Attribution of Ex-Post Realized Sharpe Ratio to The Predictability Of The Ex-Ante Forecast Return and Risk.

Vol. 18, No. 3, 2020

Masahito Shimizu

We propose to use an attribution formula that enables the ex-post realized Sharpe ratio to be decomposed into realized market conditions, ex-ante predictability of the returns, risk magnitude, and risk factors. We compare the predictability of the ex-ante return and ex-ante risk directly, quantitatively identifying the main source of the reduction of the Sharpe ratio using the attribution. Furthermore, we use excess Sharpe ratio attribution analysis to simultaneously evaluate the qualities of the portfolio and benchmark. We additionally provide numerical examples of the attributions using sector indices.