Portfolio Risk Attribution

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This article discusses the importance of matching the risk attribution model to the investment process. Methodologies are presented for decomposing risk in one of several ways: at the security level and at the sector level in terms of allocation effect and selection effect, or in terms of a set of factors. It is also shown that these methods are equally valid for either forecast risk or realized risk.

Authors: Jose Menchero, Ph.D., CFA; Junmin Hu, Ph.D, CFA- Thomson Financial

This article discusses the importance of matching the risk attribution model to the investment process. Methodologies are presented for decomposing risk in one of several ways: at the security level and at the sector level in terms of allocation effect and selection effect, or in terms of a set of factors. It is also shown that these methods are equally valid for either forecast risk or realized risk.

Portfolio Risk Attribution

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