Calculating Portfolio Returns from Sector Weights and Returns
Summary
When a portfolio is split among sectors and each sector’s return is known for the same period, its aggregate return is the weighted sum of those sector returns. Multiply each sector return by its portfolio allocation and add the results; the weights should sum to the full portfolio. This gives the portfolio’s realized return for that period, assuming the stated weights describe the relevant holdings over it.
To assess performance relative to a benchmark, the document suggests comparing the portfolio with a hypothetical sector portfolio weighted by sector market capitalization, or with the broad market when the portfolio spans all sectors. The difference is a measure of relative performance, but it does not by itself establish that the portfolio earned alpha. The discussion is a simple return-attribution example; it does not address changing weights, fees, or risk adjustment.
Key ideas
- A portfolio’s return is the sum of each sector’s return multiplied by its portfolio weight.
- The sector allocations must collectively represent the whole portfolio.
- Relative performance can be measured against a sector portfolio weighted by market capitalization.
- Subtracting a broad market return gives a simple comparison but does not establish alpha.
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# Comparing Returns on a Sector Basis # Comparing Returns on a Sector Basis I'd like to compare the returns of a portfolio segregated by groups to the returns of those groups in total. So say for example I have a portfolio with 40% Industrials and 60% Technology, then over the the same period the returns of Industrials and Technology were 5% and 10%, respectively. How can I get some idea of the performance of the portfolio? Or just some ideas on how to measure the performance of a portfolio. Thanks ## Answer by phlsmk (score 4, accepted) https://quant.stackexchange.com/a/443 Unless I'm missing something, your question simply boils down to arithmetic as you have the portfolio allocation and sector returns explicitly identified: Portfolio Return = (Sector 1 Allocation) * (Sector 1 Return) + (Sector 2 Allocation) * (Sector 2 Return) + ... + (Sector n Allocation) * (Sector n Return) Where the allocations among n sectors add up to 100%. ## Answer by Joshua Chance (score 1) https://quant.stackexchange.com/a/457 Portfolio's return minus the return of a hypothetical tech and industrials portfolio with market weighting. For example, if the total market cap of the industrial sector is twice that of tech then a two sector portfolio using market relative weights would be 66.67% industrials and 33.33% tech. If you are investing in all sectors then it is as trivial as subtracting the market return from your portfolio's return. This, however won't tell you what, if any alpha you've achieved.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.