Explain what performance measurement, attribution and appraisal each contribute to evaluating a portfolio and how the three link together
The idea
Measurement answers what happened: it computes the portfolio's return, usually time-weighted, and its risk over the period. Attribution answers why: it breaks the return or risk relative to a benchmark into effects tied to specific decisions, such as sector weighting or security choice. Appraisal answers whether it was skill: it adjusts for risk, using measures such as the information ratio, and asks whether the results are likely to repeat. Each stage depends on the one before, so an error in measuring returns or choosing the benchmark contaminates both the attribution and the verdict on skill. The trap is treating a high return, which is only a measurement result, as proof of skill. The findings then feed back into the investment process.
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- Set out the features that make a performance attribution process effective
- Distinguish attribution of return from attribution of risk, and macro-level from micro-level return attribution
- Explain how transactions-based, holdings-based and returns-based attribution work, with the strengths and weaknesses of each
- Interpret where a portfolio's returns came from using a given attribution method
- Interpret the results produced by attribution analysis of a fixed-income portfolio
- Discuss the factors that guide the choice of a risk attribution method
- Separate the part of investment results due to the asset owner's decisions from the part due to the manager, and interpret each
- Explain the purposes served by liability-based benchmarks
- Set out the main kinds of asset-based benchmark
- Discuss the tests used to judge whether a benchmark is sound
- Explain how a misspecified benchmark distorts attribution and appraisal analysis
- Set out the difficulties that arise when choosing benchmarks for alternative investments
- Compute and interpret maximum drawdown, drawdown duration, upside and downside capture ratios, the appraisal ratio and the Sortino ratio
- Explain where appraisal measures and associated metrics fall short
- Assess whether an investment manager's results reflect genuine skill