Sharpe Ratio Contribution and Attribution Analysis

Abstract

We consider it essential for investment managers, risk managers and investors to understand contributions to risk-adjusted performance and attribute differences in risk-adjusted performance, between portfolios to investment decisions on the level of meaningful portfolio segments. Recent advances in risk-adjusted performance analysis have made Sharpe Ratio contribution and attribution possible, filling an empty slot in the toolkit of portfolio analysts. In our research note, we do propose and discuss two methods to analyze contributions to Sharpe Ratio and we attribute Sharpe Ratios differences to meaningful management decisions.

Keywords: Sharpe Ratio, Contribution, Attribution, Risk-Adjusted Performance, Portfolio Analysis