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Performance Attribution for a Personal Portfolio Against a Sector Benchmark

Article Quant Q&A · Author: Vikram Murthy
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Summary

The document asks how to attribute performance for an individual portfolio with a small number of stocks across several sectors. It compares the portfolio’s sector weights with sector weights in the S&P 500 and considers normalizing the benchmark sector weights so they sum to the same total as the portfolio’s sector allocation. The answer reframes attribution around the investor’s actual decision process: choosing allocations among sectors, then choosing securities within sectors.

Under that framing, attribution should assess those allocation and selection decisions, while sectors receiving no portfolio allocation are treated as having followed the benchmark within the sector. The response says a single period attribution can evaluate the decisions when there is no trading during the period; trading during the period calls for multi period attribution. It does not provide calculations or establish that simple normalization alone measures performance. The proposed interpretation depends on the chosen benchmark and an accurate account of how the portfolio was constructed.

Key ideas

  • Attribution should reflect the portfolio’s investment decisions and how capital was allocated.
  • The answer frames sector allocation and security selection within sectors as separate decisions.
  • Zero allocation to a sector does not change the attribution method, though it affects the results.
  • A single period approach can assess decisions without intervening trades, while trading calls for multi period attribution.

Tags

Portfolio constructionEquitiesStatistics
Full text
# Performance attribution for personal portfolio - weight attribution


# Performance attribution for personal portfolio - weight attribution












i am building a platform for portfolio analytics, part of which is a performance attribution module. Given that most individual portfolio's can never have the same number of stocks as say, a mutual fund, i was wondering how do i perform a stock weighting attribution for a portfolio. For instance if my portfolio had 6 stocks from 3 sectors (Energy , Utilities and Telecom) which have a split of 30-40-30 in my portfolio how do i compare it to the market weightage? These sectors have a weight of 8%, 3% and 2.4% in the S&P 500 ..i don't get anything by comparing 30-40-30 with 8-3-2.4 instantly ..but if i normalize 8-3-2.4 into 60-22-18 i can tell that my pf did better / worse because i was over/under weight one of the sectors. Can i use a normalized method for comparison ? most online sources and papers give a plain vanila approach assuming this can only be used by fund managers et al .. kindly correct me if i am wrong.

Regards, vikram

## Answer by Andre Mirabelli (score 1)

https://quant.stackexchange.com/a/24311

Effective PA is dependent on the correct description of the investment process. I am not sure, from what you say, what exactly is your investment process. But let me presume that it is the following: You have chosen the S&P500 as your benchmark. You first distributed your money among sectors. (That you gave many sectors zero weight is not relevant to the methodology, only to the resulting evaluations.) Then you distributed your money within each of the Sectors, making one decision for each sector. In sectors that you put no money, it is assumed that the zero value was distributed as the BM did. Thus, a PA model should rightly only evaluate your four decisions. A straightforward application of a single period PA would provide these results. Of course, if there were any trading during the period, you would need a multi-period PA in order to fairly evaluate your decisions.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.