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What is a performance attribution analysis?

Attribution analysis is a sophisticated method for evaluating the performance of a portfolio or fund manager. Attribution analysis is an evaluation tool used to explain and analyze a portfolio’s (or portfolio manager’s) performance, especially against a particular benchmark.

What is interaction effect in performance attribution?

The interaction effect is the combination of the selection and allocation effect. The interaction effect is essentially the cumulative effect created by asset allocation, security selection, and other investment decisions made by the portfolio manager.

How do you calculate performance attribution analysis?

How to Calculate Performance Attribution

  1. Locate Sector Weights and Returns of the Portfolio.
  2. Multiply Sector Weights by Differences in Returns.
  3. Calculate Aggregate Estimate for Pure Sector Allocation.
  4. Calculate Sector Weights by Differences in Returns.
  5. Calculate Aggregate Estimate for Returns.

What is attribution interaction?

The attribution analysis dissects the value added into three components: Interaction captures the value added that is not attributable solely to the asset allocation and stock selection decisions. It is positive when outperformance is overweighted and when underperformance is underweighted.

What is the purpose of portfolio analysis?

Definition: Portfolio analysis is an examination of the components included in a mix of products with the purpose of making decisions that are expected to improve overall return. The term applies to the process that allows a manager to recognize better ways to allocate resources with the goal of increasing profits.

How do you explain interaction effects?

An interaction effect happens when one explanatory variable interacts with another explanatory variable on a response variable. This is opposed to the “main effect” which is the action of a single independent variable on the dependent variable.

How do you calculate portfolio contribution?

The contribution calculation is done by multiplying each sector’s weight by its return, and then summing the results.

What is portfolio risk attribution?

Risk attribution is a methodology to decompose the total risk of a portfolio into smaller terms. The problem is solved in a way that the smaller decomposed units of the total risk are interpreted as the risk contribution of the corresponding subsets of the portfolio.

Why is performance attribution important?

Performance attribution quantifies the relationship between a portfolio’s excess returns and the active decisions of the portfolio manager. It provides feedback to portfolio managers, senior management, and external consultants on why the portfolio either outperformed or underperformed its benchmark.

What is portfolio analysis techniques?

Corporate portfolio analysis is a set of techniques that help strategist in taking strategic decision regard to individual product or business in a firm’s portfolio. Each segment of a company’s product line is evaluated including sales, market share, cost of production and potential market strength.

Why is performance attribution important to a portfolio manager?

Attribution has become a standard part of the portfolio manager’s analytical tool kit, providing insights into what is working and what is not. It provides a way to communicate where the returns have come from when meeting with prospects as well as existing clients.

How does performance measurement, attribution and risk work?

Integrate data across the front and middle office. Performance, attribution, and risk calculations rely on the quality of data and its aggregation. With the same data and analytics at the heart of each, you can optimize your data integration from performance measurement and client reporting to supporting your compliance and risk workflows.

What does FactSet do for performance measurement and attribution?

With sophisticated next generation portfolio analytics paired with our award-winning B-One performance and attribution solution, FactSet brings you greater accuracy of performance calculations and reporting with higher frequency and faster delivery while helping you maintain compliance with new and emerging regulations.

How are models used to calculate performance of a portfolio?

Models are mathematical formulas which take into consideration various characteristics of the portfolio and its related index to both reconcile to the excess return as well as to apportion the excess return across two or more of our effects.