Topic · Portfolio Management & Risk
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35 articles · 5 checkpoints · 22 deeper reads · 8 reference notes
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A way to split a portfolio's outperformance versus its benchmark into exactly two decisions, did the manager overweight the right sectors, and did the manager pick the right stocks within each sector, so both skills can be judged separately.
Instead of splitting outperformance by sector, split it by the same style and industry factors a risk model already tracks, so the same numbers that explain your risk also explain exactly where your return came from.
You don't need to see a single position in a fund to figure out roughly what it holds, just regress its historical returns against a handful of style indices and read off the weights that best explain how it actually behaved.
The same portfolio can report two very different returns depending on whether you measure the manager's skill or the investor's actual experience, and mixing the two up is one of the most common errors in performance reporting.
A single equation connecting how good your predictions are, how many independent bets you make, and how much extra return you should expect, and the reason it argues that breadth can matter as much as raw skill.
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