Risk-adjusted performance attribution and portfolio optimisations under tracking-error constraints

Philippe Bertrand

Journal of Asset Management, 2009, vol. 10, issue 2, No 2, 75-88

Abstract: Abstract This paper examines whether the risk-adjusted performance attribution process is consistent with portfolio optimisation under tracking-error constraints. Since Mina (2003), Bertrand (2005, 2008b) and Menchero and Hu (2006), risk attribution has been widely used in the performance attribution process. This paper analyses and discusses the information ratio decomposition proposed by Menchero (2007) in the light of the analysis of risk-adjusted performance attribution developed by Bertrand (2005). It is also shown that only optimisation under the tracking-error constraint alone is consistent with the risk-adjusted performance attribution process. Indeed, as soon as additional constraints (for example, on total risk) are introduced, the component information ratios of the decisions are no longer the same or equal to the information ratio of the whole portfolio. This means that no equilibrium between expected return and relative risk has been reached.

Keywords: risk-adjusted performance attribution; risk attribution; performance attribution; tracking error; portfolio optimisation; risk aversion (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.1057/jam.2008.37

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