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A note on portfolio performance attribution: Taking risk into account

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  • Philippe Bertrand

    (GREQAM-2, rue de la charité)

Abstract

This paper shows that performance attribution considered alone can be misleading. Indeed, portfolio managers who know perfectly the distribution of an asset's returns and who perform a relative portfolio optimisation according to that information may be penalised in some of their choices by the performance attribution process. In order to solve this apparent paradox, this paper proposes taking risk into account. It is established that the appropriate definition of risk in this management context is relative risk, as measured by the standard deviation of the tracking error. This measure makes it possible to justify the choices which were previously penalised. Moreover, it is proved that the information ratio of each decision (asset allocation and security selection) is the same. This means that some equilibrium between expected (or ex post mean) return and relative risk has been reached.

Suggested Citation

  • 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.
    • Handle: RePEc:pal:assmgt:v:5:y:2005:i:6:d:10.1057_palgrave.jam.2240159
    DOI: 10.1057/palgrave.jam.2240159
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    Cited by:

    1. 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.
    2. Jan Frederick Hausner & Gary van Vuuren, 2021. "Portfolio performance under tracking error and benchmark volatility constraints," Journal of Economics, Finance and Administrative Science, Emerald Group Publishing Limited, vol. 26(51), pages 94-111, June.
    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. Michael Maxwell & Gary Vuuren, 2019. "Active Investment Strategies under Tracking Error Constraints," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(3), pages 309-322, August.
    6. 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.

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