Analysis of active portfolio Management

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!


anyone can help answer??? Thanks!!!


Remember that active return is the return above the benchmark. The benchmark portfolio is weighted in a certain way, by class and by security. If you bet that a certain class and/or/both security will outperform, you will get a higher return than the benchmark. However, this can be done by taking more risk which is not meant for every investor. So, the best approach is to use the information ratio.

You can decompose active return and active risk into the class and security selection indicating the source of the active return / risk. Both chapters talk about the same thing, don’t get mad.