Dollar-weighted return · Dollar-weighted return Compute the internal rate of return that will equate the future value of the beginning value and cash inflows with the ending value 197650=135000+50000+31 Dollar-weighted return(r)=7.16%
Dollar-weighted return • Dollar-weighted return: – Compute the internal rate of return that will equate the future value of the beginning value and cash inflows with the ending value Dollar-weighted return( r) =7.16% 26/31 197650 =135000 ( 1 + r ) + 50000 ( 1 + r ) ⇒
Which return measure is better Dollar weighted return Affected by any cash investments or withdrawals to the portfolio during the period over which the return is calculated Measure the returns to the owner of the portfolio allowing the benefits or losses associated with cash distributions and withdrawals during the measurement period Time-weighted return Not affected by any cash investment or withdrawals to the portfolio during the period over which the return is calculated Measure returns on the securities held in a portfolio (or performance of the manager)
Which return measure is better • Dollar weighted return: – Affected by any cash investments or withdrawals to the portfolio during the period over which the return is calculated. – Measure the returns to the owner of the portfolio allowing the benefits or losses associated with cash distributions and withdrawals during the measurement period. • Time-weighted return – Not affected by any cash investment or withdrawals to the portfolio during the period over which the return is calculated. – Measure returns on the securities held in a portfolio (or performance of the manager)
How to choose benchmark? Purpose of benchmark Evaluate performance Provide value weightings Provide constraints to portfolio manager Benchmark portfolio sually a passive index or portfolio US Sometimes no appropriate single benchmark exists, so you build your own
How to choose Benchmark? • Purpose of benchmark – Evaluate performance – Provide value weightings – Provide constraints to portfolio manager • Benchmark portfolio – Usually a passive index or portfolio – Sometimes no appropriate single benchmark exists, so you build your own
Performance measure of your portfolio any abnormal returns Compare the return of the portfolio with a comparable market index and adjust for risk Measure of abnormal returns Jensens alpha Treynor's measure Sharpes measure Information ratio
Performance measure of your portfolio • Any abnormal returns – Compare the return of the portfolio with a comparable market index and adjust for risk. • Measure of abnormal returns – Jensen’s alpha – Treynor’s measure – Sharpe’s measure – Information ratio
Performance measure of your portfolio Fix a particular time interval for which you are interested in assessing the performance of your portfolio Find a market index as market portfolio Determine the portfolio beta B compute the average return of your portfolio(denoted Dy ar ) the average risk-free return ar le average benchmark return ar over the interval you are assessing the performance of your portfolio
Performance measure of your portfolio • Fix a particular time interval for which you are interested in assessing the performance of your portfolio; • Find a market index as market portfolio; • Determine the portfolio beta • compute the average return of your portfolio (denoted by ), the average risk-free return , the average benchmark return over the interval you are assessing the performance of your portfolio. β p p ar f ar arM