Risk attribution LOS 35.g - factor's contribution?

CFA Level III Portfolio Management
#1

Hi everyone,

I am looking for some help to understand the below concept !

Reading 35 Risk attribution

There is a tab where you have the investment process : bottom up, top down factor based.

Regarding top down (industry selection etc…) relative risk attribution the analysis of tracking error is : attribute tracking error to allocation and selection (I guess it is allocation to industries etc vs benchmark ?)

Regarding risk absolute attribution, it is factor marginal contribution to risk.

My question : why allocating risk attribution to factors if the decision is not factor based ? Why not allocating risk based on decisions made ex : choosing different industry exposure

Let me know if not clear

Thanks !!

#2

As I understand it (I may be wrong, so any confirmation is appreciated), in absolute mandates we are considering the exposure of the portfolios per se.
While in bottom-up we consider the contribution of each single position to total risk, because each position is a potential contributor in the decision process, in top-down we are more focused on the exposure to known return factors (the rewarded factors from other readings, such as market, size etc.) as these are relevant in the decision process.