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A new decomposition of portfolio return

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  • Robert Fernholz

Abstract

For a functionally generated portfolio, there is a natural decomposition of the relative log-return into the log-change in the generating function and a drift process. In this note, this decomposition is extended to arbitrary stock portfolios by an application of Fisk-Stratonovich integration. With the extended methodology, the generating function is represented by a structural process, and the drift process is subsumed into a trading process that measures the profit and loss to the portfolio from trading.

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  • Robert Fernholz, 2016. "A new decomposition of portfolio return," Papers 1606.05877, arXiv.org.
    • Handle: RePEc:arx:papers:1606.05877
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    References listed on IDEAS

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    1. Winslow Strong, 2012. "Generalizations of Functionally Generated Portfolios with Applications to Statistical Arbitrage," Papers 1212.1877, arXiv.org, revised Oct 2013.
    2. Alexander Schied & Leo Speiser & Iryna Voloshchenko, 2016. "Model-free portfolio theory and its functional master formula," Papers 1606.03325, arXiv.org, revised May 2018.
    3. Robert Fernholz, 2001. "Equity portfolios generated by functions of ranked market weights," Finance and Stochastics, Springer, vol. 5(4), pages 469-486.
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    Cited by:

    1. Robert Fernholz, 2017. "Stratonovich representation of semimartingale rank processes," Papers 1705.00336, arXiv.org.
    2. Ricardo T. Fernholz & Robert Fernholz, 2022. "Permutation-weighted portfolios and the efficiency of commodity futures markets," Annals of Finance, Springer, vol. 18(1), pages 81-108, March.

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