Correct Calculation of Ex Post Contributions to Return, Volatility and Tracking Error

Abstract

In this research note, we explain how to correctly calculate contributions to ex post returns and ex post volatility and tracking error. The calculations are performed on a realistic portfolio, i.e. a portfolio in which the asset weights change over time due to active management and passive drift. Further, we introduce a novel type of calculation that allows the distinction between risk contributions due to positioning and trading. We also show how risk contributions can be calculated without calculating a covariance or even volatility.

Keywords: Ex Post Portfolio, Contribution Return, Volatility, Tracking Error