Investment process defines if the manager strategy is top-down or bottom-up. Top-down approach to portfolio attribution is most appropriately used when analyzing an investment manager with a top-down investment process. Top-down focuses on one or multiple hierarchical weighting allocation decisions prior to security selection. Top-down decision making process Weighting Effect is primary, and the Selection Effect is secondary. For example, an investment manager may first decide on weighting in sectors followed by weighting in market capitalization before making security selection. Bottom-up approach is most relevant in analyzing an investment manager with a bottom-up process that emphasizes security selection. Bottom-up decision making process, the Selection Effect is primary, and the Weighting Effect is secondary.
Multi-Period linking methodology is how returns are linked over time. Since attribution effects are results of the portfolio's relative weighting and performance to those of the benchmark, the return comparison can be performed using arithmetic or a geometric method. The arithmetic method refers to simple subtractions of return terms in formulas and is very intuitive; however, it is only applicable in a single-period analysis. The geometric method takes a geometric difference by translating returns into "return relatives" (that is, one plus the return), performing a division of the two return relatives, and subtracting one from the result. It is more complicated than the arithmetic method, but it has the benefit of being theoretically sound for both single-period and multi-period analyses when applied to Effect statistics.