Abstract
This paper shows that performance attribution considered alone can be misleading. Indeed, portfolio managers who know perfectly the distribution of an asset's returns and who perform a relative portfolio optimisation according to that information may be penalised in some of their choices by the performance attribution process. In order to solve this apparent paradox, this paper proposes taking risk into account. It is established that the appropriate definition of risk in this management context is relative risk, as measured by the standard deviation of the tracking error. This measure makes it possible to justify the choices which were previously penalised. Moreover, it is proved that the information ratio of each decision (asset allocation and security selection) is the same. This means that some equilibrium between expected (or ex post mean) return and relative risk has been reached.
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