Evaluating portfolio performance
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Evaluating Portfolio Performance. Two key points: Evaluation must account for risk Total return of assets under management matters Measuring return: Dollar weighted return = IRR Time weighted return = arithmetic average. Risk adjusted performance measures: The Big 3. Sharpe measure (S):

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Evaluating portfolio performance
Evaluating Portfolio Performance

  • Two key points:

    • Evaluation must account for risk

    • Total return of assets under management matters

  • Measuring return:

    • Dollar weighted return = IRR

    • Time weighted return = arithmetic average


Risk adjusted performance measures the big 3
Risk adjusted performance measures: The Big 3

  • Sharpe measure (S):

    • (rp - rf ) / p

    • Risk premium per unit of total risk

    • Appropriate for evaluating entire investment portfolio

    • Evaluates manager’s ability to diversify unsystematic risk


Risk adjusted performance measures the big 31
Risk adjusted performance measures: The Big 3

  • Treynor (T)

    • (rp - rf ) / bp

    • Risk premium per unit of systematic risk

    • Appropriate for evaluating subsets of securities within a portfolio

    • Assumes subset is part of a well diversified portfolio


Risk adjusted performance measures the big 32
Risk adjusted performance measures: The Big 3

  • Jensen’s Alpha (a)

    • ap = rp - [rf + bp(rm - rf )]

    • Absolute CAPM risk adjusted performance

    • Appropriate for evaluating an actively managed portfolio

    • Can be converted into Appraisal Ratio:

      • ap / sep


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