- Performance Attribution Analysis
- Analysis and break up of investment decisions taken by money manager of a portfolio to identify successes and failures, and causes for both. Main points addressed are: The sources of additional value, Significance of timing in short term investment decisions, Accuracy in selection of securities.
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Any value can be broken up in many ways. Unless there is a clear question that the individual components address, they can be construed in many, often misleading, ways. A number of technical problems have arisen from such a ‘decomposition’ view of attribution, leading many to be confused by and/or to disregard its results.
While it is necessary to first distinguish between seeking causes in the uncontrollable effects of the market versus the controllable decisions of the portfolio manager, it is then also necessary to clearly formulate the economic meaning that each attribute is intended to address. If such attributes correctly model the effects, their measures will appropriately roll up to the total investment results being analyzed.
Only by employing such clear modeling procedures can one obtain a useful analysis that can actually be informative about the market or decision sources of investment results.
It is also important to note that, in order to obtain any economically meaningful results, modern portfolio theory requires that any consideration of performance be coupled with a corresponding consideration of risk. So, performance attribution without risk attribution is very misleading. And ‘corresponding’ here must be strictly construed in the context of the specific question that each attribute addresses (explicitly in opposition to any vague ‘association’) so as to ensure that the answer is properly formulated.