CHAPTER 18
EVALUATION OF PORTFOLIO PERFORMANCE
18.1 The Two Questions of Performance Measurement (Exhibit 18.1)
▪ There are two main questions that an investor attempts to answer when assessing the
18.2 Simple Performance Measurement Techniques
18.2.1 Peer Group Comparisons (Exhibit 18.2)
18.2.2 Portfolio Drawdown (Exhibit 18.3)
18.3 Risk-Adjusted Portfolio Performance Measures
18.3.1 Sharpe Portfolio Performance Measure
18.3.2 Treynor Portfolio Performance Measure
▪ Postulated two components of risk:
18.3.3 Jensen Portfolio Performance Measure
▪ Originally based upon the Capital Asset Pricing Model (CAPM)
▪ Applying the Jensen Measure
18.3.4 The Information Ratio Performance Measure
18.3.5 Sortino Performance Measure
▪ Measures the portfolio’s average return in excess of a user-selected minimum acceptable
18 –
2
© 2019 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
▪ Captures just the downside risk (DR) in the portfolio
▪ Comparing the Sharpe and Sortino Ratios
18.3.6 Summarizing the Risk-Adjusted Performance Measures (Exhibit 18.7)
18.4 Application of Portfolio Performance Measures
18.5 Holdings-Based Portfolio Performance Measurement
18.5.1 Grinblatt-Titman (GT) Performance Measure (Exhibit 18.13)
18.5.2 Characteristic Selectivity Performance Measure (Exhibit 18.14)
18.6 The Decomposition of Portfolio Returns
18.6.1 Performance Attribution Analysis
▪ Attribution analysis attempts to distinguish the source of the portfolio’s overall performance.
▪ This method compares the manager’s total return to the return for a predetermined benchmark
18.6.2 Fama Selectivity Performance Measure (Exhibit 18.17)
▪ Fama (1972) suggested that overall performance in a portfolio, in excess of the risk-free rate,
18.7 Factors That Affect Use of Performance Measures
18.7.1 Demonstration of the Global Benchmark Problem (Exhibit 18.18)
© 2019 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
▪ Their results show that using alternative market proxies for different countries generates
SMLs that differ substantially during a given time period and are very unstable over time.
18.7.2 Implications of the Benchmark Problems
18.7.3 Required Characteristics of Benchmarks
▪ Unambiguous
18.8 Reporting Investment Performance
18.8.1 Time-Weighted and Money-Weighted Returns
▪ Money-weighted returns are the discount rates that set the present value of future cash flows
18.8.2 Performance Presentation Standards (Exhibit 18.19)
▪ Introduced in 1987 and formally adopted in 1993, the CFA Institute has developed the
comprehensive Performance Presentation Standards (PPS).
▪ In 1999, the CFA Institute adopted the companion Global Investment Performance Standards