What does attribution analysis help determine in portfolio management?

Attribution analysis is a critical tool in portfolio management that assesses a manager's performance by breaking down the returns generated by a portfolio into various components. This analysis provides insights into how much of the portfolio's returns can be attributed to the manager's specific decisions, such as asset selection and market timing, in comparison to a benchmark.

The primary objective of this analysis is to evaluate the skill of the manager in navigating the market relative to the performance of the benchmark. By comparing the excess return of the portfolio against the benchmark, investors can identify whether the returns were a result of the manager's actions or simply a reflection of the market's overall movement. This ability to differentiate performance allows stakeholders to make informed decisions regarding the value a particular manager adds, beyond passive investment strategies.

In contrast, the other options do not fully capture the essence of attribution analysis. While risk management strategies and transaction costs can influence overall portfolio performance, attribution analysis specifically focuses on assessing the manager's active contribution to returns relative to the benchmark. Additionally, overall market performance is a broader measure and does not provide the granular insights that attribution analysis delivers regarding a portfolio manager's effectiveness.