Allocation effect

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• Alpha returnThe return a portfolio earned over and above what CAPM says was required for the market risk it took — the part of performance not explained by the market.
• BenchmarkThe independently published index a scheme's performance is measured against, chosen to match its investment objective, asset allocation and strategy, and disclosed in the Scheme Information Document.
• BetaHow sharply a share moves relative to the market index — beta 1 moves with the index, above 1 amplifies it, below 1 dampens it. The standard measure of systematic risk.
• Credit riskThe risk that a borrower fails to meet its obligations on a debt instrument — the risk credit rating agencies exist to grade, and the one that triggers a segregated portfolio in a mutual fund.
• Downside riskThe probability of a loss on account of falling asset prices in changing market conditions — the half of volatility investors actually mind, measured by maximum drawdown and value at risk.
• Holding period returnThe total of coupons, income earned on reinvesting them and any capital gain, expressed as a percentage of the purchase price — a crude return for the period actually held, with no compounding in it.