Performance evaluation Fan longzhen
Performance Evaluation Fan Longzhen
Discussion points How to measure returns? How to choose benchmark? How to adjust for risk? Performance attribution Active return and risk
Discussion Points • How to measure returns? • How to choose benchmark? • How to adjust for risk? • Performance attribution. • Active return and risk
Why evaluate performance? If you manage your own portfolio, then you may possibly want to make alternations to your investment procedures If someone else is managing your portfolio, you want to know if they are adding value If not, perhaps you may have them manage a smaller amount of your money (or even replace them), or add constraints to what they want can do
Why evaluate performance? • If you manage your own portfolio, then you may possibly want to make alternations to your investment procedures. • If someone else is managing your portfolio, you want to know if they are adding value. • If not, perhaps you may have them manage a smaller amount of your money (or even replace them), or add constraints to what they want can do
How to measure returns The portfolio value is affected by cash inflow and outflows How do we compute the portfolio return when portfolio size changes over time In the following case, the portfolio has an ending value of S135. 000. and then an additional $50000 cash investment was made to the portfolio on january 5. what is the portfolio return in january market value of portfolio on January 5 Investment asset 31-Dec Before After 31-Jan cash equivalents $5, 000 400054000 7000 B sonas 1000011000|1100060650 stocks 1200001227001227001300 total 135000137700187700197650
How to measure returns • The portfolio value is affected by cash inflow and outflows. How do we compute the portfolio return when portfolio size changes over time? • In the following case, the portfolio has an ending value of $135, 000, and then an additional $50000 cash investment was made to the portfolio on January 5. What is the portfolio return in January. asset 31-Dec Before After 31-Jan. cash equivalents $5,000 4000 54000 7000 Bonds 10000 11000 11000 60650 stocks 120000 122700 122700 130000 total 135000 137700 187700 197650 January 5 Investment market value of portfolio on
Time-weighted returns Compute the return for two periods dec 31-Jan 5 and jan 5-Jan 31) Return on dec 31-jan 5 ($1377013501350020% Return on jan 5-Jan 31 ($197650187708770053% Time-weighted returns (1+2%)(1+5.3%)-1=741
Time-weighted returns • Compute the return for two periods (Dec 31-Jan 5 and Jan 5-Jan 31) • Return on Dec 31-Jan 5: – ($137700-135000)/135000=2.0% • Return on Jan 5-Jan 31 – ($197650-187700)/$187700=5.3% • Time-weighted returns: – (1+2%)(1+5.3%)-1=7.41%