Risk and performance attribution

Risk and performance attribution Article

Barber, JR. (2010). Risk and performance attribution . 7(3), 22-28.

This paper develops a method based upon Sharpe's (1990 and 1992) Asset Class Factor Model for decomposing both the risk and return of an actively managed portfolio into independent categories associated with passive asset allocation, active asset allocation, and security selection. Because the risk measures for each category are additive, they can be used to separately evaluate asset allocation and security selection performance. Indeed, we are able to decompose the Sharpe ratio of a portfolio into a ratio attributed to passive asset allocation and incremental ratios associated with active asset allocation and security selection. In this way, it is possible to independently examine in a risk-return framework the efficacy of asset allocation and security selection. © Joel R. Barber, 2010.