Faculty of Economics and Politics, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, UK. e-mail: sesll@econ.cam.ac.uk

Revised 12 June 2003.

Abstract

In this paper the authors examine the tendency of portfolio managers to under/over-weight portfolios with respect to a particular style such as book-to-price ratio, dividend yield, etc. The authors provide a test statistic for style tilting and a decomposition of 'active' risk for large cross-sectional portfolios with respect to exposures of a given attribute. The decomposition classifies risk into three categories — symmetric covariation, asymmetric covariation and variation — and allows the investment style to be identified and quantified.