Performance Attribution and Investment Alpha › Key Parameters
Michael BrenndoerferDecember 17, 20251 min read
Quantitative FinanceAll chapters Part 9 of 15Portfolio Theory and Investment Analysis
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The key parameters for factor-based attribution are:
- Alpha (): The intercept of the regression, representing returns unexplained by factor exposures.
- Betas (): Factor loadings measuring the sensitivity of the portfolio to each factor.
- Factors (): Systematic risk drivers (Market, Size, Value).
- Residuals (): Idiosyncratic returns specific to the portfolio.
Risk attribution reveals what percentage of portfolio volatility comes from factor exposures versus stock-specific risk. A portfolio with high systematic variance is primarily driven by factor movements, while high idiosyncratic variance suggests more active, stock-specific bets.