Which factor is NOT considered when calculating the security selection effect?

The correct factor that is not considered when calculating the security selection effect is market volatility. The security selection effect specifically focuses on how the choices of individual securities contribute to a portfolio's overall performance relative to a benchmark. It measures the impact of selecting specific securities rather than investing in a broad market index.

In this context, residual returns play a significant role as they represent the performance of the individual security after accounting for the systematic risk factors and the benchmark's overall return. Security choice effectiveness directly pertains to how well the selected securities perform compared to other options, and risk factors of the selection relate to specific characteristics that influence the individual securities' performance.

Market volatility, while it may affect overall market conditions and the investment environment, does not directly factor into the security selection effect calculations, which rather focus on the intrinsic performance of the securities chosen in relation to expectations and performance benchmarks.