Factor Analysis: Are You Getting the True Portfolio Picture?

Veres, Robert N.
February 1996
Journal of Financial Planning;Feb1996, Vol. 9 Issue 1, p30
Academic Journal
Mainstream planners have evolved from fund pickers to asset managers, embracing modern portfolio theory and the idea that the crucial decision in portfolio design lies in selecting and controlling the asset classes. Until mutual funds are forced to disclose their portfolios more frequently than twice a year, there is no way to pick great managers and control or even know the precise asset composition of one's portfolio. This was the birth of something called "factor analysis," or, more precisely, "style attribution analysis," a mathematical concept that is sweeping through the profession unparalleled in recent memory. The subject of three educational sessions at industry conferences in 1995, the concept of factor analysis is suddenly available to the planning community in the form of new software packages developed by Zephyr Associates, CDA/Weisenberger, Value Line, and, most recently Ibbotson Associates Inc. Planners who at least pretend to be conversant with new, intriguing technological concepts tend to have a marketing advantage over those who prefer to practice by the tried-and-true methods of old.


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