Hello and welcome back. Thank you for joining me again. Once the investor has calculated the return on a risk-adjusted basis and compared it to an appropriate benchmark, the next logical question to ask is where did the return come from? What can we attribute the return to? This is the process of performance attribution. In this module, you're going to learn about two identical tools widely used in practice to evaluate the performance of investment strategies. The first is style analysis, which was first introduced by the Nobel Laureate, William Sharpe. This analytical tool became popular when a well known study in the 1990s showed that 91.5% of the total variation returns of 82 mutual funds could be explained simply by their asset allocation decisions across three asset classes, Treasury bills, bonds, and stocks. Later studies that considered more broader asset classes show that as much as 97% could be explained just by asset allocation decisions. In this module, you will learn how to use style analysis to gain further insight into performance evaluation. Rather than simply focusing on the risk-adjusted returns, style analysis will help you determine what drives the return performance of your portfolio, how much is explained by style or asset allocation and how much is due to security selection. Having mastered style analysis, we will then move into performance attribution. Again, rather than simply focusing on the risk-adjusted returns, practitioners also want to know which decisions resulted in superior or inferior performance. Superior investment performance depends on the ability to be in the right securities at the right time. Such timing and selection ability, for example, may be considered broadly as being in equity securities or fixed income securities when the stock market is doing well, which we can call asset allocation contribution. Or it may be defined, at a more detailed level, as choosing the relatively better performing stocks within a particular segment, which we're going to call security selection. Performance attribution procedures will teach you how to decompose the overall performance into discreet components that can be identified with a particular level of the portfolio selection process, whether it's asset allocation or sector allocation or securities selection. Here we go. Enjoy.
