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Risk-adjusted performance attribution and portfolio optimisations under tracking-error constraints

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  • Philippe Bertrand

    (University of Aix-Marseille 2 GREQAM, UMR-CNRS 6579 2)

Abstract

This paper examines whether the risk-adjusted performance attribution process is consistent with portfolio optimisation under tracking-error constraints. Since Mina (2003), Bertrand (2005, 2008b) and Menchero and Hu (2006), risk attribution has been widely used in the performance attribution process. This paper analyses and discusses the information ratio decomposition proposed by Menchero (2007) in the light of the analysis of risk-adjusted performance attribution developed by Bertrand (2005). It is also shown that only optimisation under the tracking-error constraint alone is consistent with the risk-adjusted performance attribution process. Indeed, as soon as additional constraints (for example, on total risk) are introduced, the component information ratios of the decisions are no longer the same or equal to the information ratio of the whole portfolio. This means that no equilibrium between expected return and relative risk has been reached.

Suggested Citation

  • Philippe Bertrand, 2009. "Risk-adjusted performance attribution and portfolio optimisations under tracking-error constraints," Journal of Asset Management, Palgrave Macmillan, vol. 10(2), pages 75-88, June.
    • Handle: RePEc:pal:assmgt:v:10:y:2009:i:2:d:10.1057_jam.2008.37
    DOI: 10.1057/jam.2008.37
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    References listed on IDEAS

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    1. Philippe Bertrand, 2005. "A note on portfolio performance attribution: Taking risk into account," Post-Print hal-01833048, HAL.
    2. Philippe Bertrand, 2005. "A note on portfolio performance attribution: Taking risk into account," Journal of Asset Management, Palgrave Macmillan, vol. 5(6), pages 428-437, April.
    3. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(4), pages 1851-1872, September.
    4. Philippe Bertrand, 2008. "Risk Attribution and Portfolio Optimizations Under Tracking-Error Constraints," Post-Print hal-01833102, HAL.
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    Cited by:

    1. Eric Benhamou & Beatrice Guez, 2018. "Incremental Sharpe and other performance ratios," Journal of Statistical and Econometric Methods, SCIENPRESS Ltd, vol. 7(4), pages 1-2.
    2. Michael Maxwell & Michael Daly & Daniel Thomson & Gary van Vuuren, 2018. "Optimizing tracking error-constrained portfolios," Applied Economics, Taylor & Francis Journals, vol. 50(54), pages 5846-5858, November.
    3. Wade Gunning & Gary van Vuuren, 2019. "Exploring the drivers of tracking error constrained portfolio performance," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1684181-168, January.
    4. L. Theron & G. van Vuuren, 2020. "Exploring the Behaviour of Actively Managed, Maximally Diversified Portfolios," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 44(2), pages 49-72, August.
    5. Eric Benhamou & Beatrice Guez, 2021. "Computation of the marginal contribution of Sharpe ratio and other performance ratios," Working Papers hal-03189299, HAL.

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