A Subspace Approach to Portfolio Analysis

In this article, we highlight the subspace approach to portfolio analysis. We focus on equities and show that the subspace approach leads to the decomposition of a portfolio in terms of the range space and the orthogonal subspace of systematic risk factors. The subspace decomposi tion helps us to decompose the performance of a portfolio in terms of a modified information coefficient, the portfolio risk, and market volatilities (one temporal and one cross-sectional). The subspace approach gives a road map on how to model returns and risk. Some applications of the subspace approach are also presented.