Quant Nugget 5: Return Calculations for Leveraged Securities and Portfolios
GARP Risk Professional, pp. 40-43, October 2010
7 Pages Posted: 12 Sep 2010 Last revised: 15 Nov 2010
Date Written: September 10, 2010
How can we report returns for a swap that has zero value? How can we perform return optimization for a zero-value long-short portfolio? By introducing a suitable "basis", it is possible to extend the definition of returns to leveraged products in such a way that performance attribution and portfolio optimization are feasible. Risk-adjusted performance attribution and connections of performance attribution with probability theory are also discussed.
Keywords: Leverage, portfolio weights, swaps, futures, risk-adjusted performance attribution, hierarchical portfolios, conditional probability
JEL Classification: C1, G11
Suggested Citation: Suggested Citation