[R-SIG-Finance] Return.portfolio contribution documentation incorrect.

[Eric Zivot]

Hey Ilya,
I go over the Return.portfolio() calculations by hand in my online computational finance book (see https://bookdown.org/compfinezbook/introcompfinr/portfolios-and-portfolio-returns.html ). This might help you find out where you are going wrong with your calculations below. 
Cheers,
Eric

-----Original Message-----
From: R-SIG-Finance <r-sig-finance-bounces using r-project.org> On Behalf Of Ilya Kipnis
Sent: Tuesday, June 15, 2021 4:56 AM
To: r-sig-finance <r-sig-finance using r-project.org>
Subject: [R-SIG-Finance] Return.portfolio contribution documentation incorrect.

So, I'm trying to replicate Return.portfolio, since I intend to port it over into Python, and while I understand most of the calculations, there's one thing that bugs me, namely contribution. Here's my MRE:

getSymbols(c('SPY', 'TLT'), from = '1990-01-01')

R = na.omit(cbind(Return.calculate(Ad(SPY)), Return.calculate(Ad(TLT)))) R_na <- cbind(Return.calculate(Ad(SPY)), Return.calculate(Ad(TLT)))

out <- Return.portfolio(R = R,
                        weights = c(1, .6), verbose = TRUE, rebalance_on = NA, contribution = FALSE)

r_calc <- cbind(R, 0)
cumprods <- cumprod(1+r_calc)

# EOP.Value
eop.value <- cumprods * matrix(rep(c(1, .6, -.6), nrow(tmp)), ncol = 3, byrow = TRUE) print(tail(round(eop.value-out$EOP.Value), 6))


# BOP.Value
bop.value <- eop.value/(1+r_calc)
print(tail(round(bop.value-out$BOP.Value), 6))


# EOP.Weight
eop.weight <- eop.value/rowSums(eop.value) print(tail(round(eop.weight-out$EOP.Weight), 6))

# BOP.Weight
bop.weight <- bop.value/rowSums(bop.value) print(tail(round(bop.weight-out$BOP.Weight), 6))

In all cases, everything matches up besides the contributions. When I implement what's defined in the functionality, namely:

contribution: The per period contribution to portfolio return of each asset. Contribution is calculated as BOP weight times the period's return divided by BOP value. Period contributions are summed across the individual assets to calculate portfolio return

So, contribution should be:

contrib <- bop.weight*r_calc/bop.value

Which gives me the following result:

tail(contrib)

            SPY.Adjusted  TLT.Adjusted X0
2021-06-07 -1.200836e-04 -0.0003804248  0
2021-06-08  2.642538e-05  0.0008710532  0
2021-06-09 -1.845971e-04  0.0010924038  0
2021-06-10  5.746216e-04  0.0007415750  0
2021-06-11  2.031949e-04 -0.0001984059  0
2021-06-14  2.750417e-04 -0.0009408983  0

Yet, the *actual* contribution, as defined by Return.portfolio, is:

 tail(out$contribution)
            SPY.Adjusted  TLT.Adjusted Residual
2021-06-07 -0.0008054887 -0.0007500412        0
2021-06-08  0.0001770824  0.0017120802        0
2021-06-09 -0.0012372908  0.0021622383        0
2021-06-10  0.0038457437  0.0014807881        0
2021-06-11  0.0013662344 -0.0003985565        0
2021-06-14  0.0018523718 -0.0018870209        0

Which clearly does not match.

Is the documentation incorrect, or am I misunderstanding something?

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