Performance+Evaluation

Performance+Evaluation - Portfolio Performance Evaluation...

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Portfolio Performance Evaluation Reading: Chapter 24
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2 What Is Required of a Portfolio Manager? The ability to derive above-average returns for a given risk level Superior risk-adjusted returns can be derived from superior timing superior security selection superior execution of trades (low trading cost) The ability to diversify the portfolio to eliminate unsystematic risk except in the case of information advantage market-neutral funds
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Two common ways to measure average portfolio return: 1. Time-weighted returns 2. Dollar-weighted returns Returns must be adjusted for risk. Average returns
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The geometric average is a time-weighted average. Each period’s return has equal weight. Time-Weighted Returns        n 2 1 n G r 1 ... r 1 r 1 r 1
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Internal rate of return considering the cash flow from or to investment Returns are weighted by the amount invested in each period: Dollar-Weighted Returns       n n r C r C r C PV 1 ... 1 1 2 2 1 1
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6 Portfolio Performance Measures Peer group comparison – qualitative Ranked against other funds in the same investment objective group No explicit adjustment for risk
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7 Portfolio Performance Measures Risk-adjusted measures of portfolio
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Performance+Evaluation - Portfolio Performance Evaluation...

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