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Factor attribution that adds up

Author

Listed:
  • Sanne de Boer

    (QS Investors)

Abstract

Existing implementations of factor attribution only explain part of a quantitatively managed portfolio's return, even when factor models are all that is behind the investment strategy. We propose an alternative method that aligns stock-specific risk in how exposure to factors is taken in the portfolio with how their performance is measured, thus making factor attribution ‘add up’. As part of developing this framework, we show how bounds on asset weights and industry exposures in mean-variance optimization implicitly protect against model risk.

Suggested Citation

  • Sanne de Boer, 2012. "Factor attribution that adds up," Journal of Asset Management, Palgrave Macmillan, vol. 13(6), pages 373-383, December.
    • Handle: RePEc:pal:assmgt:v:13:y:2012:i:6:d:10.1057_jam.2012.21
    DOI: 10.1057/jam.2012.21
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    References listed on IDEAS

    as
    1. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1683, August.
    2. repec:bla:jfinan:v:58:y:2003:i:4:p:1651-1684 is not listed on IDEAS
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    Cited by:

    1. Sanne De Boer & Vishv Jeet, 2016. "Aligning factor attribution with latent exposures," Journal of Asset Management, Palgrave Macmillan, vol. 17(7), pages 502-525, December.

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