L9_performance

L9_performance - FINANCE431 INVESTMENTS Lecture 9:...

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FINANCE 431 INVESTMENTS Lecture 9: Performance Evaluation
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FIN 431: Investments 2 Introduction Suppose you are given the choice to choose a mutual fund for your retirement account The average risk-free rate is 5% Which fund will you choose? Fund A B C Average Return 10% 15% 12% Std. Dev. 10% 20% 15% Beta 0.5 2.2 1.3
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FIN 431: Investments 3 Factors That Lead to Abnormal  Performance How to evaluate performance? risk adjustment benchmark Where does superior performance come from? Who is Peter Lynch? Market timing skills Stock picking skills
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FIN 431: Investments 4 Risk Adjusted Performance: Sharpe 1) Sharpe Measure r r p - r - r f r r p = Average return on the portfolio = Average return on the portfolio r r f = Average risk free rate = Average risk free rate p p = Standard deviation of portfolio = Standard deviation of portfolio return return p p σ σ
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FIN 431: Investments 5 Risk Adjusted Performance: Treynor 2) Treynor Measure r r p - r - r f ß ß p r r p = Average return on the portfolio = Average return on the portfolio r r f = Average risk free rate = Average risk free rate ß ß p p = Portfolio = Portfolio β β
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L9_performance - FINANCE431 INVESTMENTS Lecture 9:...

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