Test Review 3

Test Review 3 - Review #3 Portfolio Performance evaluation...

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Review #3 Portfolio Performance evaluation Treynor’s measure 1. A measure of the payoff for taking systematic risk a. The slope of the that graphs alpha against beta b. Appealing because it weighs its mean excess return against its systematic risk rather than against total risk 2. Sharpe Ratio a. A measure of payoff for total risk taken 3. Alpha a. Most widely used performance measure Performance measurement with changing portfolio composition For actively managed portfolios it is helpful to keep track of portfolio composition and changes in portfolio mean and risk Market Timing Involves shifting funds between a market index portfolio and a safe asset, like t bills or money market, depending on whether the market as a whole is expected to out perform the safe asset Performance attribution procedures Asset allocation (%of stocks/bonds) + Sector allocation (which bonds/stocks)= alpha Studies attempt to decompose overall performance into discrete components that may be identified with a particular level of the portfolio selection process Start from the broadest allocation choices and progressively focus on ever finer details of portfolio choice The difference between an active and passive portfolio is the sum of the contributions to performance of a series of decisions made at various levels of the portfolio construction process a. Components: broad asset market allocation choices across stocks bonds and money markets b. Industry choice in each market c. Security choice within each sector Bogey- the return an investment manager is compared to for performance evaluation Asset allocation Decisions- % of stocks or Bonds To measure the success of active portfolio’s asset allocation, change weights of benchmark to same weights of active portfolio Sector and Security decisions – which stocks or bonds Figure out the sector returns compared to the index returns Style analysis Explanation of the returns of funds is largely due to the asset allocation decision Portfolio management -Making investment decisions Parts of the investment process: 3 o Objectives Return requirements Risk tolerance o Constraints Liquidity Horizon Regulations Taxes Unique needs o Policies Asset allocation Diversification Risk positioning Tax positioning Income generation Objectives- center on the risk return trade off Risk return trade off- if an investor is willing to take on risk, there is the reward of higher expected returns Investor categories
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o Individual investors- factors affecting return and risk are life cycle stages and individual preferences o Personal trusts - established when an individual confers legal title to property to another person or institution to manage that property for one or more beneficiaries , limited in scope and are risk averse than individuals Beneficiaries - receive interest and dividend income from the trust during their life time
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This note was uploaded on 02/27/2008 for the course FNCE 4030 taught by Professor Madigan,ge during the Fall '07 term at Colorado.

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Test Review 3 - Review #3 Portfolio Performance evaluation...

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