To calculate the within-sector selection effect, use the formula below:
within-sector selection effect = ∑ [(wBj) × (RPj – RBj)]
where:
wBj = investment weight given to the asset class in the benchmark portfolio
RPj, RBj = investment return to the asset class in the manager’s actual portfolio and the benchmark portfolio, respectively
within-sector selection effect = [0.97 × (0.184 – (–0.2326)] + [0.03 × (0.02 – 0.02)] = 0.4041 = 40.41%
Blakely gained an additional 40.41% by selecting securities that were superior to the securities within the benchmark. This higher return was attributable to her stock selection skills in picking specific stocks that outperformed the market benchmark. This enabled her to capture excess returns (alpha) in excess of the S&P 500 benchmark
