Fama's Decomposition of Return

Inputs Return Decomposition Ranking

Average Standard Portfolio Target Risk Risk Premium Due To Risk Net Manager's Net
Portfolio Return Deviation Beta Beta Premium Risk Selectivity Manager's Investor's Diversification Selectivity Risk Selectivity
X 15.00% 20.00% 2.5 2.000 10.00% 12.50% -2.50% 2.50% 10.00% -3.41% 0.91% 3 1
Y 8.00% 14.00% 0.5 0.650 3.00% 2.50% 0.50% -0.75% 3.25% 3.86% -3.36% 2 3
Z 6.00% 9.00% 0.35 0.350 1.00% 1.75% -0.75% 0.00% 1.75% 2.34% -3.09% 1 2

Other Information
S&P 500 10.00% 11.00%
90-day T-Bill Rate 5.00%
 Item Explanation
Average Return Average
Standard annual return
deviation over period
of annual being
returns overexamined
period being
Standard Deviation examined
Portfolio Beta Beta of portfolio for the period being examined.
Target Beta Target beta of portfolio for the period. This is used to evaluate
the how close the manager was in targeting the riskiness of the
portfolio to that desired by the client.
Risk Premium Average return minus average risk-free rate.
Risk Premium Due To: Risk The amount of the risk premium that the portfolio should have
earned given its beta, market return, and risk-free rate.
Risk Premium Due To: Selectivity The risk premium in excess of that explained by the portfolio's
beta, market return, and risk-free rate. In other words, this is the
portion of the return that is due to the manager's skill.
Risk: Manager's The portion of the risk premium due to risk that is explained by
the difference between the actual beta and the target beta.
Risk: Investor's The amount of the risk premium due to risk that is explained by
the investor's target beta.
Diversification The difference between the return explained by the total risk of
the portfolio and the systematic risk of the portfolio. This will
be zero for perfectly diversified portfolios.
Net Selectivity The difference between the risk premium due to selectivity and
diversification.
The ranking by absolute value of manager's risk. Absolute
Ranking: Manager's Risk value is used because zero is best. Large absolute values
indicate that the manager missed the target beta by a large
amount.
Ranking: Net Selectivity Ranking by manager's skill as measured by net selectivity.