Investment Theory #15: Performance Attribution

This is the second in a three-part series on investment performance evaluation. The series explores: 1) Performance Measurement, 2) Performance Attribution, and 3) Performance Appraisal. In other words, how much we made, how much we made compared to a benchmark, and how much we made adjusted for the amount of risk we took on.

Performance evaluation allows us to examine the effectiveness of our investment process. It provides us with a systematic way of judging our decision-making process and improving on it, which is what investment theory is all about.

Today’s post deals with performance attribution, which is a technique used to explain why a portfolio’s performance differed from a benchmark. That difference is known as active return. For example, if our portfolio returned 10% while the S&P500 returned 20%. Our active return would be -10%.

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