Hi all.
I am confused with the following concepts from two different chapters (An introduction of Multi factor model and analysis of portfolio management . Hope someone can help! thanks in advance.
In chapter of multi-factor model return attribution part: Active return = factor return + security selection return
where factor return is sum of (factor sensitivity for each factor in active portfolio - factor sensitivity for same factor in benchmark portfolio)*factor risk premium for each factor
Security selection return= active return - factor return
while in chapter of active portfolio management, active return = asset allocation return (from deviation of asset class portfolio weights from benchmark weight)+ security selection return (from active returns within asset classes).
May i ask whether both chapters’ “security selection” means same things? If so, does it mean factor return = asset allocation return. However, seems factor return involves factor sensitivity which is not same as benchmark portfolio’s factor sensitivity while asset allocation involves asset class weight deviated from benchmark.
Hope someone can provide a link between these two chapters’ concept!
Thanks!