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Sharpe (1992) shows that asset allocation plays an important part in the return of a portfolio. Style analysis is a method for measuring a portfolio manager’s asset allocation skill by determining what style he/she uses and what the outcome of pursuing that style is. The style of a fund is preliminarily determined by its asset classes holding e.g. government bonds, corporate bonds, large-value stocks, large-growth stocks, small stocks, etc.

Mathematically, style analysis is the use of constrained regression to model the returns of a portfolio as a set of positive weights in instruments that represent different investment styles. For example, a growth index might be used to represent growth-style investing and a value index might be used to represent value-style investing. The weights of each of the instrument in the style portfolio can then be used as guidance on how the portfolio was constructed and how it has performed.

Excerpt contains several sets of instruments (“styles”) that can be used in this analysis, but it is possible to define your own universe of styles. For example, we can model our portfolio as a style portfolio made up of positions in a growth index and a value index and use the results of the style analysis to determine whether the portfolio has a growth or value bias. In another example, we could use sector indices to represent the portfolio and determine the weight of the sector index in the portfolio of styles.

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