Allocation effect
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
In performance attribution, the contribution to active return from weighting sectors or asset classes differently than the benchmark.
Allocation effect in plain English
Imagine you and a friend both invest in the same pool of stocks, but you decide to put MORE of your money into tech and LESS into oil than they did. The allocation effect measures how much of your win (or loss) came purely from those bet-the-farm decisions about which groups to favor — not from picking better individual stocks. In plain terms, it's the scoreboard line that says, "You beat the benchmark partly because you leaned into the sectors that happened to do well." It isolates the payoff from your big-picture weighting choices.
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