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Ben Davis
Research and Insights
Articles by Ben Davis
The Characteristics of Factor Portfolios
Research Report | Mar 1, 2011 | Ben Davis, Jose MencheroResearch from MSCI’s Jose Menchero was recently published in the Journal of Performance Measurement. This paper provides an intuitive foundation for understanding and interpreting factor models. It shows every factor can be represented by a factor-mimicking portfolio, whose return exactly replicates the payoff to the factor. Pure factors provide a way of placing surgical bets and disentangling the often confounding effects of multi-collinearity.
Pitfalls in Risk Attribution
Research Report | Feb 24, 2011 | Ben Davis, Jose MencheroWhile performance analysis is typically conducted on a benchmark-relative basis, risk analysis is often presented on an absolute-return basis. This mismatch between sources of risk and return leads to the pitfall that active management decisions cannot be evaluated on a risk-adjusted basis. In particular, usage of absolute return sources in risk attribution may lead to non-intuitive marginal contributions to risk and flagging aggressive positions as risk reducing. These pitfalls can be...
Beyond Brinson: Establishing the Link Between Sector and Factor Models
Research Report | Apr 21, 2010 | Ben Davis, Jose MencheroBrinson sector-based attribution explains active return in terms of intuitive allocation and selection decisions. However, it cannot easily disentangle competing industry and style effects. We introduce a special type of factor model with five defining characteristics that exactly replicates the classic Brinson model. We show that this “Brinson-replicating” factor model easily extends to explain more general types of investment processes. In this extension,...
Multi-Currency Performance Attribution
Research Report | Feb 16, 2010 | Ben Davis, Jose MencheroThe two main drivers of global investment performance are local asset returns and currency exchange rate returns. These two sources represent distinct investment decisions, and should be attributed independently, as argued by Singer and Karnosky. This article presents a refined and generalized version of the Singer-Karnosky model for multi-currency attribution.
Risk Contribution is Exposure times Volatility times Correlation
Research Report | Jan 15, 2010 | Ben Davis, Jose MencheroThis Research Insight introduces a general risk attribution framework known as the x-sigma-rho methodology. Given any return attribution scheme, this approach attributes the corresponding risk as a product of exposure, volatility, and correlation. Several examples are provided to illustrate application of the technique.