Modern Portfolio Theory: Foundations, Analysis, and New Developments, + Website

Chapter 19

Performance Attribution

Markowitz portfolio theory is discussed at length in finance textbooks and finance classes around the world, and several Nobel prizes have been awarded (to Markowitz himself, and to professors Tobin and Sharpe) for achievements rooted in Markowitz portfolio theory. But time goes on, and recently newer investment models and concepts have emerged. Chapters 19 and 20 explore a few financial developments that emerged after Markowitz portfolio theory was decades old. These new ideas are not completely independent of Markowitz portfolio theory. These concepts, models, and institutions coexist and are tangential to Markowitz's venerable theory. In view of the importance of Markowitz portfolio theory, and also the importance of these newer developments, it is worthwhile to consider how they interact. After reviewing the new developments, we ponder the possibility that they might have a symbiotic relationship with, or might conflict in some way with, Markowitz portfolio theory. Chapter 19 begins this inquiry by exploring portfolio performance attribution. Chapter 19 is an extension of Chapter 18 that reflects what some portfolio managers are doing today.

The manager of a hedge fund that is a fund of funds might use portfolio performance attribution to select acquisitions. Or a mutual fund, or other portfolio, manager who is considering retaining money management services (of someone who might even be a competitor) might employ portfolio performance attribution ...