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Chapter 15 Performance Measurement. How Should Investors Measure Risk?. Standard Deviation Investors with limited holdings Beta Investors with a wide array of holding. How Should Investors Select Funds?. Performance Indexes Provide a method of comparing funds with different

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Presentation Transcript
Chapter 15 performance measurement
Chapter 15Performance Measurement


How should investors measure risk
How Should Investors Measure Risk?

  • Standard Deviation

    • Investors with limited holdings

  • Beta

    • Investors with a wide array of holding


How should investors select funds
How Should Investors Select Funds?

Performance Indexes

Provide a method of comparing

funds with different

risk-return characteristics


Performance indexes
Performance Indexes

  • Sharpe’s Performance Index (PIS)

  • Treynor’s Performance Index (PIT)

  • Jansen’s Performance Index (PIJ)

  • Performance Indexes With APT(PIA)


Sharpe s performance index
Sharpe’s Performance Index

  • Based on the Slope of the CML

  • Uses Standard Deviation to Measure Risk

  • The Higher the Index

    • The better the performance

  • Investors Only Hold the Mutual Fund


Treynor s performance index
Treynor’s Performance Index

  • Based on SML

  • Uses Bets to measure Risk

  • The Higher the Index

    • The better the performance

  • Investors Hold Many Assets

  • For Investors Only Interested in Whether They Beat the Market


Jensen s performance index
Jensen’s Performance Index

  • Based on CAPM

  • Uses Beta to Measure Risk

  • Determines How Much One Fund Outperforms or Underperforms Another Fund

  • Determines the Significance of Results

  • Investors Hold Many Assets


Performance indexes with apt
Performance Indexes With APT

  • One or More Factors Determine Risk

  • Jensen’s Performance Measure

  • Examine the Difference Between

    • Actual and expected average rate of return

  • Determines the Significance of Results

  • For Investors Who Want to Compare Their Performance With Other Fund Managers


Summary
Summary

  • Standard Deviation Appropriate

    • Sharpe’s index

  • Beta Appropriate

    • Treynor’s index

    • Jensen’s index

  • One or More Factors Determine Risk

    • APT


Empirical evidence for mfs
Empirical Evidence For MFs

  • MFs performance Fall Behind the Market

  • MFs can not Outperform

    • Buy-the-market and-hold policy

  • International MFs Tend to do Better

    • Outperform the S&P 500

    • Choice of market portfolio critical

  • Bond Funds Underperform the Indexes

    • Relationship

      • underperformance and the expense ratio



Can fund managers time the market
Can Fund Managers Time The Market?

  • Newsletters Failed

  • Performance Attributed To

    • Problems with performance indexes


Caution about performance indexes
Caution About Performance Indexes

  • Problems

    • Historical performance is used to infer future performance

    • Difficult to measure the risk of activity traded accounts

    • Bets is not stable

      • Depends on the choice of market index

    • Overall performance indexes cannot identify

      • What activities of the portfolio manager resulted in the performance


Performance attribution
Performance Attribution

Assessing the performance of

the activities that make up

portfolio management


Levels of decisions causing excess returns
Levels Of Decisions Causing Excess Returns

  • Top-Down Approach

    • Asset allocation

    • Sector Allocation

    • Industry allocation

    • Security selection


Flow chart top down money management process
Flow Chart Top -Down Money Management Process


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