Attribution- Arithmetic or Geometric? The Best of Both Worlds

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In this article we propose a variant of the geometric method that combines the best of both approaches-the accuracy and consistency of the geometric method and the easily interpreted reporting of the arithmetic method.  We illustrate this method in a discussion of how the classical geometric method is distortion free for multiple currencies and for multiple periods.

Author: Cecilia Wong Ph.D.

Performance attribution is computed using either the arithmetic method or the geometric method.  The relative merits of these two methods are often discussed in The Journal of Performance Measurement and at performance conferences.  For a single period they produce similar results, but for multiple periods the arithmetic method produces a distortion that grows over time while the geometric method produces reports that are sometimes difficult to interpret.  In this article we propose a variant of the geometric method that combines the best of both approaches-the accuracy and consistency of the geometric method and the easily interpreted reporting of the arithmetic method.  We illustrate this method in a discussion of how the classical geometric method is distortion free for multiple currencies and for multiple periods.

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