Portfolio attribution analysis is the process of separating portfolio returns into various categories based on specific indicators of portfolio performance, such as broad asset allocation, security selection, industry, currency, and trading. This analysis allows you to determine how well your portfolio is performing.

Example: Mr. X car breaks down on the freeway. If he believes the breakdown happened because of his ignorance about cars, he is making an internal attribution. If he believes that the breakdown happened because his car is old, he is making an external attribution.

Attribution analysis is an evaluation tool used to explain and analyze a portfolio’s (or portfolio manager's) performance, especially against a particular benchmark.For portfolio managers and investment firms, attribution analysis can be an effective tool to assess strategies. For investors, attribution analysis works as a way to assess the performance of fund or money managers.

Attribution analysis focuses on three factors: the manager’s investment picks and asset allocation, their investment style, and the market timing of their decisions and trades.

The method begins by identifying the asset class in which a fund manager chooses to invest. An asset class generally describes the type of investments that a manager chooses; within that, it can also get more specific, describing a geographical marketplace in which they originate and/or an industry sector.

Style analysis:

Style analysis is the process of determining what type of investment behavior an investor or money manager employs when making investment decisions. Virtually all investors subscribe to a form of investment philosophy, and a prudent analysis of a money manager's style needs to be performed before an investor can determine whether the manager will be a good fit for his or her personal investment goals and preferences.Style analysis simply means identifying a money manager's overall investment philosophy.

There are many investment styles and variations and combinations of those styles, but some of the most common schools are growth investing, value investing and active trading.

An investor will probably be more satisfied with a money manager that matches his or her style, but there is a diversification advantage to putting some funds with money managers who have a different style from your personal one.

Growth Investing Style:

Growth investing is a style and strategy that is focused on growing capital. Growth investors typically invest in stocks or companies whose earnings are expected to grow at an above-average rate compared to its industry or the overall market. These types of stocks carry a lot of risk because shareholders rely solely on the company's success to generate returns on their investment. If the company's growth is unexpectedly slow, shareholders may end up facing a drop in share prices. Growth investing style is considered to be one of the more aggressive investment styles.

Value Investing Style:

Value investors often seek out stocks that tend to trade at a lower price relative to their fundamentals and are considered undervalued as a result. Value stocks are often identified as having traits such as a low price-to-earnings ratio or a high dividend yield. Value investors believe the market overreacts to news, whether good or bad, resulting in price movements that don't match up with a company's long-term fundamentals. Value investment style lends itself to a buy and hold approach with a lower portfolio turnover, which can also save money in terms of fees. Value investing is known for its potential to generate excellent returns, however the style is able to accomplish this because investors typically hold positions between two to three years on average. This window of time brings significant price risk and opportunity cost, so investors using this style need to be patient and aware of such risks.

Active Trading Style:

Active trading, also known as day trading or swing trading, is considered a highly-speculative trading style. A day trader buys and sells securities with the intent of holding them for a short duration, often times no longer than a day. Active traders look to take advantage of short-term price movements in highly-liquid markets like stocks, options and foreign exchange. Most active traders use leverage (debt or borrowed capital) in an attempt to enhance the potential returns of their positions. A margin account allows you to borrow money from a broker for a fixed interest rate to purchase securities with the expectation of receiving high levels of returns.

Returns-based style analysis is a statistical technique used in finance to deconstruct the returns of investment strategies using a variety of explanatory variables. The model results in a strategy's exposures to asset classes or other factors, interpreted as a measure of a fund or portfolio manager's style.