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Define the starting allocation
A fictional portfolio begins with 60 in asset A and 40 in asset B. A earns 10% and B earns −5% over the same period. Gains are 6 and −2; portfolio gain is 4 on the initial 100.
Use weights attached to that period
Starting weights are 60% and 40%, so the rate is 0.60×10% + 0.40×(−5%) = 4%. The weights sum to one and both returns cover the same dates and currency basis. Ending weights describe another capital mix.
| Asset | Starting capital | Return | Gain |
|---|---|---|---|
| A | 60 | 10% | 6 |
| B | 40 | −5% | −2 |
| Total | 100 | 4% | 4 |
Recalculate weights for the next interval
After this period the balances are 66 and 38. Without rebalancing, the next interval starts with weights 66/104 and 38/104. Reusing 60/40 implies a different allocation process, such as rebalancing back to the original weights.
Separate aggregation from attribution
The weighted sum reconciles one period’s total gain. Explaining allocation versus selection effects against a benchmark requires a further attribution model. Do not call a return contribution table proof of investment skill.