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Chapter 15 Performance Measurement

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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Chapter 15 Performance Measurement

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  1. Chapter 15Performance Measurement

  2. How Should Investors Measure Risk? • Standard Deviation • Investors with limited holdings • Beta • Investors with a wide array of holding

  3. How Should Investors Select Funds? Performance Indexes Provide a method of comparing funds with different risk-return characteristics

  4. Performance Indexes • Sharpe’s Performance Index (PIS) • Treynor’s Performance Index (PIT) • Jansen’s Performance Index (PIJ) • Performance Indexes With APT(PIA)

  5. 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

  6. 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

  7. 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

  8. 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

  9. Summary • Standard Deviation Appropriate • Sharpe’s index • Beta Appropriate • Treynor’s index • Jensen’s index • One or More Factors Determine Risk • APT

  10. 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

  11. Pension Funds Outperformed By The S&P 500

  12. Can Fund Managers Time The Market? • Newsletters Failed • Performance Attributed To • Problems with performance indexes

  13. 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

  14. Performance Attribution Assessing the performance of the activities that make up portfolio management

  15. Levels Of Decisions Causing Excess Returns • Top-Down Approach • Asset allocation • Sector Allocation • Industry allocation • Security selection

  16. Flow Chart Top -Down Money Management Process

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