Portfolio Attribution of Large Cap Companies

Portfolio managers strive to achieve their strategic goals and maximize their return on investments. This study is an analysis of portfolio attribution or how the fund manager decides where to invest and how to manage his customers’ funds. This is possible by creating portfolios based on different strategies and further analyzing the portfolio’s risk and returns. The objective is to gain insights helpful in improving the portfolio management process, its investment decision and strategy from risk and return perspective for achieving the desired investment performance. To attain this objective, the portfolio risk is analyzed on the basis of the multifactor model which features economic factors based on market, fundamental or technical data. This allows the portfolio managers to extend the use of the risk forecast from determining the expected level of risk to explaining where it is coming from and what actions should be taken to bring the portfolio into alignment. For a fundamental model the themes that are important in characterizing the behavior of securities are identified and then the asset exposure is determined. Then, factor volatilities are calculated and specific return and risk are determined. With this information, the asset’s risk as a combination of factor-related risk and specific risk is calculated. Factor-related risk is caused due to the assets exposure to each factor, the volatility and the correlations between factors. The portfolio risk is calculated in a similar manner by substituting portfolio-level exposures for asset-level exposures. Finally, returns of a portfolio are analyzed based on its sources when compared with its risk.