The Description of Portfolios

Abstract

Grinold provides a general framework for the description of various aspects of a portfolio using a set of factors. The work is cousin to the well-worn topic of performance analysis and attribution, and in that sense, is fairly represented as being old wine in new bottles—the scope is much more general, however. Grinold first provides a theoretical structure with a model that describes various aspects of a portfolio as either the allocation of a portfolio’s variance or as the covariance of two portfolios. He takes a portfolio-centric approach and explains all of the results in terms of the risk and correlation of portfolios. The expanded framework and portfolio focus opens up a wide range of problems that can be studied with the same framework. Grinold uses examples to illustrate what the methodology can accomplish and as a guide to sense when we are asking too much from the model.

TOPICS: Portfolio construction, portfolio theory, factor-based models