Saturday, 11 January 2020

Unit 13: Portfolio Performance Evaluation

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Unit 13: Portfolio Performance Evaluation

Whenever an investor employs resources, be it in the form of hiring employees for his company, establishing a charitable fund or investing money in an investment fund he will want to measure the performance of his investment.

In any of the above named cases the investor will establish an evaluation system that provides him with the feedback needed to determine whether the investment generates the predetermined utility.

The investment manager will be bound to the investment policy and subject to a constant evaluation of his achievements.

His achievement will be the return on the capital the investor provided.

The first question the investor will want to address is the question of performance.

What is good and what is poor performance and where is the line in between - the benchmark - and what to take as the benchmark.

We have examined the issues associated with portfolio evaluation by constructing simple model of NAV and Dollar-Weighted Rate of Return; methods of computing portfolio return viz.

Value-Weighted Return and Risk-adjusted Rate of Return.

We have also distinguished between performance measurement and performance evaluation and highlighted the primary components of performance namely stock selection and market timing and also the concepts and method of construction of a benchmark portfolio for comparison and evaluation with a managed portfolio.

And further, a detailed discussion is provided on risk-adjusted methods like Sharpe Treynor and Jensen's Measures.

In addition a focus is made on the performance determinants.


Benchmark Portfolio: A tool for the meaningful evaluation of the performance of a portfolio manager.

Jensen's Measure: It is an absolute measure of performance, adjusted for risk.

The Sharpe Measure: It evaluates the portfolio manager on the basis of both rate of return and diversification.

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