Perfeval - ( 29 [ ] f m p f p p r r r r-+-= Jensens Alpha:...

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Performance Evaluation
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Simplifying assumptions Portfolio composition is constant during evaluation period Stationarity Asset returns (and hence portfolio returns) have constant means, variances and covariances
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1. Sharpe ratio Useful when the portfolio in question represents the entire investment p f p r r σ -
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2. Appraisal ratio Useful when the portfolio in question is an active portfolio mixed with the passive index portfolio ( 29 p p e AR σ α =
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3. Treynor’s Measure Useful when the portfolio in question represents one of several Based on the SML specified by the CAPM p f p r r T β - =
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Treynor’s measure: An example Beta return A B M 1.0 rf SML
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4. Jensen’s Alpha Based on the SML specified by the CAPM
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Unformatted text preview: ( 29 [ ] f m p f p p r r r r-+-= Jensens Alpha: An example Beta alpha return SML 1.0 M rf Which is a better portfolio? P Q M Sharpe 0.45 0.51 0.19 Beta 0.69 1.40 1.0 Alpha 1.63 5.28 0.00 Treynor 4.00 3.77 1.63 (e) 1.95 8.98 0.00 AR 0.84 0.59 0.00 What if the manager follows a dynamic portfolio strategy? With changing portfolio composition, the assumption of constant portfolio mean return etc., is clearly inappropriate The evaluation methodology needs to keep track of portfolio composition and changes in mean return and standard deviation of return...
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This note was uploaded on 09/27/2010 for the course BUSINESS 6F:111 taught by Professor Tongyao during the Spring '09 term at University of Iowa.

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Perfeval - ( 29 [ ] f m p f p p r r r r-+-= Jensens Alpha:...

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