Factor Attribution that Adds Up

Journal of Asset Management 13, 373-383 (December 2012)

Posted: 27 Feb 2014

Date Written: 2012

Abstract

Existing implementations of factor attribution only explain part of a quantitatively managed portfolio's return, even when factor models are all that is behind the investment strategy. We propose an alternative method that aligns stock-specific risk in how exposure to factors is taken in the portfolio with how their performance is measured, thus making factor attribution ‘add up’. As part of developing this framework, we show how bounds on asset weights and industry exposures in mean-variance optimization implicitly protect against model risk.

Keywords: quantitative investing, factor attribution, shrinkage estimators

JEL Classification: G12, G15

Suggested Citation

De Boer, Sanne, Factor Attribution that Adds Up (2012). Journal of Asset Management 13, 373-383 (December 2012), Available at SSRN: https://ssrn.com/abstract=2401435

Sanne De Boer (Contact Author)

Voya Investment Management ( email )

230 Park Avenue
13th Floor
New York, NY 10069
United States

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