4 – M8l3 06 Performance Attribution V1

We can also decompose portfolio return, also called P&L or profit and loss. If we sum up the asset returns in a weighted sum using the holdings vector as weights, we have the portfolio P&L for one time period. Let’s substitute in the multifactor model expression for r. Here, we can substitute the exposure vector … Read more

3 – M8l3 05 Variance Decomposition V3

When we’ve described our portfolio in terms of several factors, we can also use that information to decompose the portfolio risk in terms of the risk due to these factors, and the idiosyncratic risk due to the error term. Let’s start with the expression for the portfolio variance. First, we write down the variance of … Read more

2 – M8l3 04 Exposure Vector V1

Let’s say we have a portfolio. That means we’ve calculated a holdings vector. So we have a vector that tells us how much money we want to invest in each asset. The holdings vector is an n-dimensional vector with one value for each company. If we take the dot product of the holdings vector and … Read more