Geometric Attribution
The most common approach to performance attribution (found in sources such as Brinson et al. 1985 and Carino 1999) can be described as "arithmetic attribution". It is arithmetic in the sense that it describes the difference between the portfolio return and the benchmark return. For example, if the portfolio return was 21%, and the benchmark return was 10%, arithmetic attribution would explain 11% of value added.
In Europe and the UK, another approach (known as geometric attribution) has been common. If the portfolio return was 21% while the benchmark return was 10%, geometric attribution would explain an active return of 10%. The reasoning behind this is that 10% of active return, when compounded with 10% of benchmark performance, produces a total portfolio return of 21%.
Adherents of the geometric approach consider it to be highly intuitive. See, for example, Bacon (2002). However, not everybody agrees on this.
One advantage of doing attribution in geometric form is that the attribution results translate consistently from one currency to another. It is plausible that this explains the popularity of geometric approaches in Europe. This is discussed further in the external link by Davies (undated).
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