The Mathematics of Returns-Based Style Analysis (Part 1) by Thomas Becker, Ph.D.

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Thu, 2002-08-08

One of the most frequently asked questions concerning the mathematics of StyleADVISOR is how exactly we calculate the style attribution coefficients which are displayed in the style map view, the asset allocation view, and the style table. The short answer to this question is very easy: We perform the returns-based style analysis that was invented by Stanford professor and Nobel laureate William F. Sharpe. In this article, I will explain the mathematics of Sharpe's algorithm. As it turns out, a fairly complete and mathematically rigorous description of the algorithm can be given without using a lot of mathematical formalism.

 
 

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