Lecture 7 - Portfolio Performance Evaluation II Flashcards
What is style analysis?
It systematically measures the exposure of managed portfolios. It is a measure of a fund/manager’s style. (Can tell you if a fund is focusing on value investing or growth investing, or whether a fund is aggressive or defensive, or large or small capitalisation investing etc).
The basic idea of style analysis is to…
Regress fund returns on indexes representing a range of asset classes (i.e. styles).
Coefficient on each index measures the…
Fund’s implicit allocation to that ‘style’. Higher coefficient means higher implicit allocation to that ‘style’. Sum of coefficients are subject to constraints - equal to 1 or 100%.
R square measures the…
Percentage of return variability attributable to style choice. It measures the explanation of dependent variables that can be explained by independent variables. It is also called coefficient of determination. It actually measures the percentage of the return availability attributable to style choice. It is the percentage of return that can be explained by different asset classes.
1 - R square actually measures the…
Percentage of return variability attributable to security analysis.
Intercept measures…
Average return from security selection of the fund portfolio. It can tell you whether security selection is successful or not. If the intercept offer is positive, security selection is successful. If the intercept offer is negative, security selection is not successful.
Studies (over 90%) have found that most variations in fund returns can be explained by…
Asset allocation.
What does performance attribution procedures do?
Decompose overall performance into discrete components that may be identified with a particular level of the portfolio selection process. (Selection or allocation ability).
What are the three components of performance attribution procedures?
- Broad asset allocation choices across equity, fixed income and money markets (like cash or T bills).
- Industry (sector) choice within each market. For example, within equity market you want to invest in energy or manufacturing industry.
- Security choice with each sector. For example, if you want to invest in the technology industry within equity markets then you can choose Apple, Google, Amazon etc.
- The first one is related to allocation ability. Last two are related to selection ability.
What do we performance attribution procedures for?
To explain the difference in returns between a managed portfolio and a selected benchmark portfolio (bogey).
Bogey is designed to measure…
The returns the portfolio manager would earn if he or she were to follow a completely passive strategy. It is a benchmark portfolio without any active management.
Passive has two attributes. What are they?
- The allocation of funds across broad asset classes is neutral (determined by the investor’s risk aversion/preference). Depends on the coefficient/index of risk inversion, denoted by A.
- Within each asset class, the portfolio manager holds an indexed portfolio. For example, within equity market it may be S&P 500 or within bond market it may be Barclay’s.
