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Calculating value-add of Stock Picking (fully-invested) vs Asset Allocation (cash vs. stock)


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It seems like you could compare the returns of your actual portfolio to the returns of a hypothetical portfolio in which cash is replaced by your actual stock holdings at proportional weights (or replaced with the previous portfolio when cash is 100%).


An easier calculation might be to compare the S&P 500 to a hypothetical portfolio in which cash allocation is identical to your actual portfolio, but your stocks are replaced by the S&P 500. The difference would be attributable to market timing. However, unlike the first method, this wouldn't measure the timing of your specific investment decisions, e.g. selling a particular stock at an opportune time.

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On 11/17/2021 at 4:26 PM, mcliu said:

When calculating returns, is there an easy way to distinguish the value of "stock-picking" vs the value of allocating more to cash at the right times?

Take stream of monthly gross long exposure and monthly long contribution (if long only just your return).

For a given month average the month end long exposure w/ prior month’s.

Monthly return / monthly avg exposure = return on invested capital.


String your monthly ROIC together to get your annualized ROIC. compare to annualized return. The difference is tour cash drag. 


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