Difference between Style Indice Benchmark and Return-based Bechmark

CFA Level III Portfolio Management
#1

Hi guys,

it looks the 2 benchmarks are very similar in using investment style indices as a benchmark. What are the major difference between them? Thanks

#2

Is there anyone who could clarify this with me? Thanks

#3

There are two subcategories of style analysis:

  • Holdings-based style analysis: here, you look at the specific holdings of a portfolio and classify its style based on the percentage of its holdings in various asset classes; e.g., 10% large-cap value stocks, 7% intermediate-term government bonds, and so on.
  • Returns-based style analysis: here, you don’t look at the specific holdings of a portfolio. Instead, you run a regression analysis of the portfolio’s returns against a set of asset-class specific indices and get coefficients that represent the best fit of the portfolio’s returns to a mix of index returns; e.g., 5% large-cap value stock returns, 8% short-term government bond returns, and so on. The regression coefficients tell you nothing about the actual holdings in the portfolio.
#4

hi, I had a similar question as you. and i figured that the difference is that the style index benchmark use only one index as benchmar, for e.g. you use a large cap value index as your benchmark. while for a return-based benchmark, several style indices could be use, for e.g. 0.8 large cap value index + 0.2 small cap growth index. hope it helps.