What fundamental assumption underlies Within-Sector Selection return analysis?

The fundamental assumption that underlies Within-Sector Selection return analysis is that the manager matches the benchmark's weights across all sectors. This implies that the analysis is focused on how the manager's performance is assessed based on the decisions made within those sectors, while maintaining a similar exposure to the benchmark.

By matching the benchmark's weights, the manager ensures that any outperformance or underperformance can be attributed to the selection of individual securities within each sector rather than differences in sector allocation. This approach allows for a clearer evaluation of the manager's skill in picking stocks within sectors, as it isolates the return contributions from security selection itself. It emphasizes the importance of analyzing how well the portfolio performs relative to the benchmark when the sector exposures are kept constant.

This methodology is crucial for performance evaluation since it helps differentiate the manager's effectiveness in security selection from the effects of sector allocation decisions. Therefore, this assumption forms the backbone of Within-Sector Selection analysis, focusing specifically on the securities chosen by the manager while adhering to the sector weightings that align with a particular benchmark.