Lecture+12+Oct+26+2011

Lecture+12+Oct+26+2011 - FINA3104:...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 12 – Portfolio Performance Evaluation Darwin Choi October 26, 2011 Outline of Today’s Lecture Performance Evaluation Overview Six Performance Measures to Adjust for Risk Application Luck or Skill? 2
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Types of Funds Funds Collect funds from individuals and invest in a wide range of securities Several types of funds: 1. Managed Investment Companies i. Open end funds (Mutual funds) Shares outstanding change when new shares are sold or old shares are redeemed Priced at Net Asset Value(NAV) = Market Value of Assets Liabilities Shares Outstanding 3 Types of Funds ii. Closed end funds No change in shares outstanding: If investors want to sell, they must sell to other investors Can be priced at Premium or Discount to NAV 2. Real Estate Investment Trusts (REITs) Invest in real estate or loans secured by real estate 3. Hedge Funds Similar to mutual funds but are structured as private partnerships Open only to wealthy or institutional investors 4
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Portfolio Evaluation Some funds earn higher returns Two issues: 1. Need to adjust for risk High Risk High Return 2. High returns could be due to luck as well Luck or skill? An octopus correctly guessed the results of the World Cup matches 5 Outline of Today’s Lecture Performance Evaluation Overview Six Performance Measures to Adjust for Risk Application Luck or Skill? 6
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Sharpe Measure Treynor Measure Jensen Measure Information Ratio Modigliani Modigliani Measure, M 2 Mixed Measure Six Performance Measures 7 Sharpe Measure: Reward to Variability Measures the reward (excess return) for bearing the total risk of the portfolio.
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Lecture+12+Oct+26+2011 - FINA3104:...

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