Which of the following is a property ofa retums-based style analysis that differentiates a retums-based from aportfolio-based approach? The retums-based analysis:
A. Is an ex-post approach that uses regression.
B. Can pinpoint the source of a manager's value added and is more rerward-looking.
C. Is an ex-post approach that can pinpoint the source of a manager's value added.
D. Uses regression and is more forward-looking.
Answer:A
The returns based approach uses regressions on historical data to theoretically decompose both portfolios and indices according to a set of factors that deliver a high coefficient of determination (i.e., R2).
The style-based approach is better at pinpointing the source of a manager's value added and is more forward looking and suited forecasting future performance.