IX . EVALUATING TRADING STRATEGIES AND PERFORMANCE. A . Evaluating Investment Portfolio Performance. One standard for comparison is the simple buy and hold into a diversified portfolio strategy
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Sharpe Ratio TreynorRatio
Jensen Measure:Jp = [rp - rf]-[p(rm-rf)]
The following represent additional issues for investment institutions regarding the difficulties of using the above risk adjusted portfolio performance measures:
The CAPM: E[rp] = rf + [p(rm- rf)]
where E[rp], rf and rm are the expected return on the portfolio, the riskless Treasury bill and the market as a whole. However, the CAPM is only a single time period model. Multiple time periods and multiple cash flows cause problems in its application. In addition, many analysts will be concerned about the many assumptions that underlie the CAPM, as well as certain statistical tests that cast doubt on the empirical validity of the CAPM.
The implementation of an investment strategy by the trader or portfolio manager leads to four primary types of friction costs:
iwii1,i2,i3,i
1.20.20.04 .01.02
2.50.40.01 .16.04
3.30.60 .02 .04 .36