Profit Attribution & the Risk-Free Rate
In the Northstar Risk/Performance application, factor analysis and profit attribution are closely linked. Any risk factor can be used both to measure current risk and to calculate risk-based profit attribution. One subtle difference between the two is the use of the risk-free rate. In this paper we dive a bit deeper into the mathematics behind factor analysis and risk-based profit attribution in an effort to better understand the output of the Risk/Performance application.