Portfolio Performance Evaluation Flashcards
What is the relationship between performance measurement, attribution, and evaluation?
Measurement - how did we do and how much risk?
Attribution - where did our return and risk come from
Evaluation - what was the quality of the decisions? what should we do about it? Luck vs skill?
What are the aspects of an effective attribution process?
- Account for all portfolio return and risk
- Reflect the investment decision making process
- Quantify the active decision
- Provide a complete understanding of excess risk and return
What is the difference between return, risk, and micro attributions?
Return is active decisions driving returns, risk is the consequences of decisions, micro is understanding the drivers of returns and when they are consistent with the process stated for each manager
What is macro attribution?
This measures the effect of the asset owners choice to deviate from SAA - manager selector rather than manager themselves
What are the characteristics, pros, and cons of returns based attribution?
This is when we just look at total returns and is appropriate when we don't have underlying info Pros: 1. Easy Cons: Least accurate Can be manipulated
What are the characteristics, pros, and cons of holdings based attribution?
This is when you use holdings at beginning of the period and assumes all transactions happen at the end of the day. Pros: Simple Cons: Only works for low turnover
What are the characteristics, pros, and cons of transactions based attribution?
This uses both holdings and transactions driving the returns.
Pros: Accuracy
Cons: hard to implement
How do you use exposure decomposition when evaluating FI performance?
If you are a top down manager you would take a look at critical exposures like duration, credit, yield curve positioning and see how much it affected us vs the benchmark.
How do you completed a yield curve decomposition approach using duration?
You can either do a top down or bottom up. We will look at the duration of each bond or portion and calculate duration * change in yield + income. The residual portfolio return is due to active decisions
How do you completed a yield curve decomposition approach using full repricing?
You would price out every single security.
What should we consider when we are selecting a risk attribution approach for a bottom up manager?
For relative to benchmark portfolios, we want to look at marginal contribution to tracking risk. For absolute, we looks at marginal contribution to total risk
What should we consider when we are selecting a risk attribution approach for a top down or factor manager?
For realtive benchmarks, we want to look at the attribution to tracking risk relative to allocation and selection decisions. For factor based we will look at marginal contribution to tracking and active risk.
For absolute what matters is the marginal contribution to total risk and specific risk.
How do we calculate the allocation effect in the BHB model? What does the allocation effect measure?
This is calculated is the portfolio sector weight less the benchmark sector weight * the benchmark sector return. This measures the pure effect of your decisions to allocate to different sectors.
How do we calculate the selection effect in the BHB model? What does the selection effect measure?
You find the selection effect by multiplying the benchmark sector weight by the difference between the portfolio and benchmark sector returns. This measures the pure effect of security selection within a sector
How do we calculate the interaction effect in the BHB model? What does the interaction effect measure?
The interaction effect is captured by the difference in the weights of a sector * the difference in returns for a sector. The interaction explains the combined effect of sector weighting and sector stock picking. For example, if you overweight a sector that you are a poor stock picker in, there is excess (under) performance missed in allocation and selection effects.
