Risk Attribution and Portfolio Optimizations Under Tracking-Error Constraints

This paper examines wether risk attribution process is consistent with portfolio optimizations under tracking-error constraints. Since Mina (2003), Bertrand (2005) and Menchero and Hu (2006), risk attribution has been widely used in the performance attribution process. This article presents an extension of our previous work on risk attribution to others portfolio optimization contexts. It is shown that only optimization under the tracking-error constraint alone is consistent with the risk attribution process. Indeed, as soon as additional constraints (e.g. on total risk) are introduced, the risk attribution method conflicts with the performance attribution process, preventing us from legitimating all the optimal decisions taken by a portfolio manager.