What is factor-based attribution?
Factor-based performance attribution is commonly used to explain the sources of realized return of a portfolio. The methodology relies on a factor model of asset returns to decompose a portfolio’s return according to a set of factors.
What are equity factors?
Equity factor investing is a systematic approach to evaluating companies. Companies are assessed on how attractive they are based on one or more factors, and then ranked against other firms. Higher ranked companies may indicate a greater opportunity for alpha.
What is Equity Factor Model?
Equity factor-based investing is a form of active management that aims to achieve specific risk or return objectives through systematic, rules-based strategies. It can be used in a number of applications — for example, static tilts, active fund substitution, and portfolio completion.
What is the most commonly used attribution model for equity portfolios?
The two most common approaches are the Brinson model (Brinson et al., 1986) and a regression-based analysis (Grinold, 2006).
What is risk factor attribution?
Risk-based performance attribution is a performance attribution model that utilizes a factor-based risk model. Excess returns are decomposed to active risk factor exposures, into a Risk Factors Effect (systematic), and a Risk Stock Specific Effect (stock selection).
What is Brinson model?
The Brinson model attributes the excess return almost entirely to security selection. In contrast, the risk-based performance attribution indicates excess return is attributable to both systematic risk exposures and security-specific decisions.
What do you mean by equity?
Equity represents the value that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debts were paid off. The calculation of equity is a company’s total assets minus its total liabilities, and is used in several key financial ratios such as ROE.
How are factor exposures calculated?
Measuring factor exposure Once a factor has been defined, the factor exposure of an index can be measured as the sum of the factor scores of the index’s constituents, multiplied by each constituent’s weight in the index.
What is a factor-based model?
Factor models are financial models that use factors — that can be technical, fundamental, macroeconomic or alternate to define a security’s risk and returns. These models are linear, as they define the securities returns to be a linear combination of factor returns weighted by the securities factor exposures.
What are factor-based strategies?
A factor-based investment strategy involves tilting investment portfolios towards and away from specific factors in an attempt to generate long-term investment returns in excess of benchmarks.
What is attribution in private equity?
Performance attribution is the tool to address this challenging task. The aim of performance attribution is the dissection of the portfolio performance into several components, where each component is associated with a particular decision in the investment process.
What is Brinson attribution model?
Brinson attribution refers to performance attribution based on active weights. There are different variations, but the effects usually include allocation, security selection, currency, and potentially others. In contrast, risk-based performance attribution decomposes excess return to active risk factor exposures.
How does a risk-based performance attribution framework work?
Risk-based performance attribution is a performance attribution model that utilizes a factor-based risk model. Excess returns are decomposed to active risk factor exposures, into a Risk Factors Effect (systematic), and a Risk Stock Specific Effect (stock selection).
How does the four factor performance attribution model work?
The four-factor performance attribution model decomposes the value added by quantifying the risk exposures and return sources of both the manager and the benchmark so that it becomes immediately clear how the manager added the value.
Which is an example of multi factor attribution?
For this reason, risk-based performance attribution can be considered a multi-factor approach, allowing you to analyze the impact of exposures to multiple factors at once while not being impacted by the reporting grouping used. In the example below, we are analyzing a sample European equity portfolio to illustrate how the methodologies differ.
How are excess returns used in performance attribution?
Excess returns are generally decomposed into allocation and security selection effects, as well as currency and other effects occasionally. Risk-based performance attribution is a performance attribution model that utilizes a factor-based risk model.