Components of Portfolio Return

The return on an actively managed portfolio can be broken down into three components:

  1. The market return, or return on the market index
  2. Style return, measured as the difference between the manager’s benchmark portfolio and the market index
  3. Active return, measured as the difference between the portfolio return and that of the manager’s benchmark

For example, consider a manager who invests in large cap value stocks. The market index would probably be the S&P 500, but the manager’s benchmark would be the S&P 500 Value. If the S&P 500 earns 10%, the S&P 500 Value earns 9% and the manager earns 11%, the manager’s 11% total return would be comprised of:

  • Market return = 10%
  • Style return =  9% – 10% = -1%
  • Active return = 11% – 9% = 2%
For more information, see all articles on: Active Management, Investment Returns, Portfolio Management

See also:
  • Total Return and Scenario Analysis in Fixed Income Portfolios
  • Performance Attribution for Fixed Income Managers
  • Macro Performance Attribution
  • Evaluating Investment Manager Performance
  • The 3-Stage DuPont Model
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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