What is the formula for Allocation/Selection Interaction return?

The formula for Allocation/Selection Interaction return, which is a measure used in performance attribution, is correctly represented by the choice that states the calculation involves the differences between the portfolio's and the benchmark's weights and returns.

In this case, the interaction return is determined by taking the difference in weights of the portfolio compared to the benchmark for a specific sector and multiplying it by the difference between the returns of the portfolio and the benchmark for that same sector. Mathematically, this reflects the idea that the interaction effects arise when there is a divergence not only in how much capital is allocated to different sectors (weights) but also in how those sectors performed (returns).

By using these differences, the formula effectively captures the impact of active management decisions in both asset allocation and selection across sectors, allowing for a more comprehensive understanding of performance relative to a benchmark. This becomes a key factor in attributing performance to specific sources rather than simply comparing returns.

The other options do not correctly encapsulate this interaction effect as they either miscalculate the nature of the components involved or neglect the necessary subtraction between the portfolio and benchmark returns and weights. Thus, option C accurately conveys the fundamental relationship underlying the Allocation/Selection Interaction return.