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Unformatted text preview: 6F:111 Investments Professor Gerry Suchanek PERFORMANCE EVALUATION: How well do managed funds perform; i.e. How well do fund mgrs. & their mgt. groups perform. How Returns are Measured: 1. Geometric Avg. w/Compounding 2. Arithmetic Avg. Simple Avg, No Compounding Notes: (1) Geometric Avgs. < Arithmetic Avgs. Always . (= only when no variation in returns.) (2) Arithmetic Avg. Exceeds Geometric Avg. by aprprox. the variance of returns. (3) The Arithmetic Avg. is an Unbiased predictor of future returns; The Geometric Avg. is a Downward biased predictor of future returns. Other Issues: (1) time-weights vs. Dollar-weight Return Measures. (2) Weighted Avg. of Arithmetic Avg. & Geometric Avg. of returns to predict future portfolio values for investment horizon, H, given a historical estimation period, T: A. Avg. x - T H 1 + G. Avg x T H PERFORMANCE COMPARISONS 1. Use Time-Weighted Returns: Considers only period-by-period returns, & uses arithmetic Avgs. 2. Adjust for risk to obtain meaningful comparisons. Do this by defining alternative investment comparison universes , where each universe consists of funds having similar risk characterics....
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