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The process I have followed so far is that I have filtered out the relevant style factors (momentum, growth, value, etc.) for a portfolio using Lasso regression and then done an OLS to calculate the factor exposures for the selected factors.

What I can't figure out is how to decompose the performance of the portfolio into the selected factor performance contributions.

Something like: Overall portfolio return = factor 1 x% + factor 2 y% + factor 3 z%.

I have tried multiplying the factor exposures into their individual returns but the final value is not at all close to the overall portfolio return.

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  • $\begingroup$ If you multiply the factor exposures into their individual returns, they should give the conditional average of the overall portfolio return as predicted by the OLS, not the real portfolio return. That (real portfolio return) you would have to add in the residuals. Is this what you are missing? $\endgroup$ Commented May 28, 2024 at 10:43

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