What is a key step in the performance evaluation process?

Attributing performance is a key step in the performance evaluation process because it involves breaking down the overall performance of an investment to understand the sources of returns. This helps assess whether the investment manager added value through effective decision-making or if performance was merely a result of market movements or other external factors. By attributing performance, investors can discern how different decisions—such as asset allocation, security selection, and timing—contributed to overall returns. This insight is essential for evaluating the effectiveness of an investment strategy and making informed decisions about future investments.

Other elements like risk budgeting, measuring relative risk, and evaluating investment strategies, while important, serve different functions in the broader context of performance analysis. Risk budgeting focuses on how much risk should be allocated to various assets, measuring relative risk considers how an investment’s risk profile compares to benchmarks, and evaluating investment strategies looks at the overall approach to investing, but they do not provide the same clarity on performance attribution.