What is used to decompose a fund manager's performance into various sources of return?

The correct answer involves using a fund's asset allocation to decompose a fund manager's performance into various sources of return. Asset allocation refers to the strategy of dividing investments among different asset categories, such as stocks, bonds, and cash. This method allows analysts and investors to understand how much of a fund's performance can be attributed to the manager's decisions regarding the distribution of capital across these different categories.

By examining asset allocation, one can assess the impact of strategic decisions and the relative performances of various asset classes on overall returns. This decomposition helps to isolate the contribution of different sources—in other words, it provides insights into how much of the return was due to market movement versus the manager's tactical decisions.

In contrast, other metrics like alpha, beta, or the Sharpe ratio focus on different aspects of performance measurement. Alpha quantifies the excess return relative to a benchmark, which does not provide insights into decision-making in asset allocation. Beta measures the sensitivity of the fund's returns to the market's movements, indicating risk rather than performance sources. The Sharpe ratio assesses the risk-adjusted return of a fund but does not reflect the specific decisions of asset allocation that contribute to varied sources of return. Thus, using asset allocation is essential for understanding the drivers