Measuring Portfolio Returns and Attributing Active Performance
Summary
The document explains how to measure realized portfolio performance and examine where returns came from. It distinguishes a single-period return calculation, which adjusts for external cash flows at the period boundaries, from two methods for handling cash flows across multiple periods: time-weighted return (TWRR) and money-weighted return (MWRR). TWRR links subperiod returns, while MWRR treats the portfolio’s cash flows and ending value as an internal rate of return problem.
It then separates portfolio return into market, style-related excess, and active return relative to a benchmark. For attribution, it describes breaking active return into sector allocation, selection within sectors, and the interaction between allocation and selection. Worked examples report TWRR and MWRR values and show attribution components summing to the stated active return. The discussion assumes cash is invested rather than held separately and gives limited detail on calculation conventions, benchmark choice, or how to handle cash flows occurring within a subperiod; results therefore depend on those implementation choices.
Key ideas
- Adjust portfolio value for external cash flows when measuring a single period’s realized return.
- TWRR links subperiod returns and reduces the effect of the timing of investor cash flows.
- MWRR is an internal rate of return that reflects the size and timing of cash flows.
- Benchmark-relative active return can be separated into allocation, selection, and interaction effects.
- Attribution components should reconcile to the portfolio’s active return.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.