Performance Attribution and Attribution Volume Two

CHAPTER 1 Basic performance evaluation models
Basis formula for the calculation of returns
Geometric linkage and scaling of returns
Internal rate of return
Time-weighted return
General aspects of the time-weighted return
Returns for investment funds based on the unit price
Comparison between the time-weighted return
and the internal rate of return
Approximation methods for the computation of the
time-weighted return
Approximation of the time-weighted return based on the
internal rate of return
Modified Dietz method
Dietz method and BAI method
Second-order Newton approximation
Active returns
Continuously compounded returns
Symmetry of the return calculation
Graphic representation of the performance
Appendix A: Equality between the time-weighted return
and the internal rate of return
Appendix B: solving polynomial equations for the
determination of internal rate of return
B.1 Newton’s Method
Appendix C: time-weighted return and the unit
price method
Conclusion
Chapter-end problems
CHAPTER 2 Passive and active portfolio management
and the characteristics of benchmarks
Basic concepts
Is passive passive?
What is passive?
If the portfolio is not passive, what is passive?
Active managers are the entrepreneurs of finance
Indexes as a representation of the market portfolio?
Conclusion
Chapter-end problems
References
CHAPTER 3 Attribution analysis for equity portfolios
Introduction to attribution analysis
Goals of an attribution analysis
Overall return as the weighted sum of individual returns
Single-period attribution analysis according to the
Brinson approach
allocation and selection
Dealing with securities outside the benchmark and portfolio
Interpretation of the interaction terms
Breakdown of the contributions on a single-stock-level
Multiperiod attribution analysis
Basic formulas for linking contributions in the
multiperiod case
Approach according to basic formula I
Approach according to basic formula II
Approach according to basic formula III
Concluding remarks on the linking algorithms
Attribution analysis in a geometric form
Method of Burnie et al
Further aspects of attribution analysis
Position-based vs transaction-based attribution analysis
Factor-based attribution analysis
Attribution analysis and valuation questions
Conclusion
Chapter-end problems
References
CHAPTER 4 Introduction to multicurrency performance
attribution
Introduction to multicurrency performance attribution
Theoretical background
Karnosky-Singer model: integrating currency effects
The multicurrency investment opportunities and
performance measurement
Generalized solution for multicurrency
performance attribution
Attribution analysis with derivative-based currency
management
Currency premium and currency surprise
Conclusion
Chapter-end problems
References
CHAPTER 5 Attribution analysis for fixed income
portfolios
Investment processes for fixed income portfolios
Determinants of investment processes for fixed
income portfolios
Comparison with the methodology for equity portfolios
Yield curves based attribution analysis using an
option-adjusted spread valuation approach
Model evaluation
Description of the effects
Attribution relative to a benchmark
Analysis with a separation of the interaction terms
Generalization of portfolios with different
currency segments
Inclusion of models for the estimation of yield curves
The methods of Nelson and Siegel, and Svensson
Principal component analysis
Alternative approaches
Consideration of reference portfolios
Duration-based approaches
Appendix A: Duration measures | Macaulay duration
Appendix B: Duration measures | Modified duration
Appendix C: Duration measures | Effective duration
Appendix D: Duration measures | Key rate duration
Appendix E: Duration measures | Spread duration
Conclusion
Chapter-end problems
Exercise 5.1 (Roll-down effect)
Exercise 5.2 (Market implicit interest rates)
Exercise 5.3 (Nelson-Siegel method)
Exercise 5.4 (Svensson’s method)
CHAPTER 6 Analysis of multiasset class portfolios and
hedge funds
Basic considerations
Attribution analysis on two levels
Contributions without separating the currency components.....271
Attribution analysis on three levels
Contributions without separating the currency effects
Contributions after separating currency effects
Implementation
Risk-adjusted attribution analysis based on the
systematic risk
Introduction
Intuitive derivation via the investment process
Approach according to Ankrim
Risk-adjusted attribution analysis based on the
Information ratio
Special aspects in the analysis of hedge funds
Attribution analysis for portfolios with short positions
Risk measures based on the drawdown
Conclusion
Chapter-end problems
CHAPTER 7 Attribution analysis with derivatives
Treatment of futures and forwards
Cost of carry
Single-stock futures
Stock market index futures
Interest rate futures
Treatment of options
Options and their valuation
Options on a single stock
Options on stock indices
Swaps
Conclusion
Chapter-end problems
References
CHAPTER 8 Global Investment Performance Standards (GIPS)
David D. Spaulding
Background
History
Applicability to asset owners
Fundamental features of the Standards
Organization definition
Composite creation
Policies and procedures
How the organization is defined
Keeping up with changes to the GIPS standards
Keeping up with changes to laws and regulations
Policy to register with the CFA Institute
Policy to assess the verifier’s independence policies
How do they calculate their total assets?
Providing reports to prospective clients and stakeholders
Portability
Updating GIPS reports
List of composites and pooled funds (limited
distribution pooled funds and broad distribution
pooled funds)
Overlay exposure and returns
Use of trade date accounting
Interest and dividend accruals
Transaction costs—actual or estimated
The use of fair value for valuations
How returns are calculated
Side pockets and subscription lines of credit
Investment discretion
Nonfee-paying portfolios
How composites are defined
Timing for portfolios and composites
Use of minimums
Significant cash flow policy
Use of leverage, derivatives, and shorts
Use of subadvisors
Picking benchmarks
Use of carve-outs
Gips reports
Portfolio level performance
Time-weighting formulas
Money-weighted returns
Asset owners
Gross- versus net-of-fee performance
Composite performance
Asset-weighted using the beginning value
Asset-weighted using the beginning value plus
exogenous (or external or weighted) cash flows
Aggregate method
Dispersion
Asset-weighted standard deviation
Equal-weighted
High/low and range
Gips verification
Conclusion
Chapter-end problems
Appendix A: Calculating estimated transaction costs
A.1 A method to estimate transaction costs
A.2 Estimating transaction costs comes in two parts
A.3 Now that we have the transaction costs, how do we
incorporate them into performance?
A.4 The challenges
A.5 A “simple” solution for monthly return methods
A.6 The firm’s policies and procedures
A.7 A solution for daily return methods
A.8 Conclusion
Appendix B: Shortcomings of The aggregate method for
composite returns
B.1 An analysis of the aggregate method to calculate
composite returns6
B.2 Background
B.3 Problems with the aggregate method
B.4 What about the Basic “Asset-Weighting” method
B.5 Conclusion
Appendix C: What is meant by time-weighting?
Appendix D: How to create carve-outs?
D.1 How can we allocate the cash to the
carved-out segments?
D.2 Additional rules
References