CHAPTER 16Factor Model (Barra) Performance Attribution

In Chapters 14 and 15 we showed how factor models can be constructed and estimated. Factor models usually serve two purposes: (1) risk forecasting and (2) performance attribution. To do risk forecasting you must be able to forecast the risk of each asset and the covariances among the assets. MSCI Barra has extensive models to do this, and we refer you to its website for more information.1 Performance attribution is our primary focus here. It involves analyzing a historical portfolio using the risk exposures of each asset and the factor returns for each factor. In this chapter we will show how a particular factor model can be used to provide useful information about portfolio performance. ...

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