CHAPTER 18
EVALUATION OF PORTFOLIO PERFORMANCE
I. Peer Group Comparisons (Exhibit 18.1)
II. Risk-Adjusted Composite Portfolio Performance Measures
A. Treynor Portfolio Performance Measure (Exhibit 18.2)
1. Postulated two components of risk:
B. Sharpe Portfolio Performance Measure (Exhibit 18.3)
C. Jensen Portfolio Performance Measure
1. Originally based upon the Capital Asset Pricing Model (CAPM)
D. The Information Ratio Performance Measure
Measures a portfolio’s average return in excess of that of a comparison or benchmark
portfolio divided by the standard deviation of this excess return
E. Comparing the Composite Performance Measures (Exhibit 18.4)
F. Application of Portfolio Performance Measures (Exhibit 18.5)
1. Total Sample Results (Exhibits 18.6 and 18.7)
18- 2
III. Other Performance Measures
A. Performance Attribution Analysis
IV. The Challenges of Global Benchmarking
A. The Global Benchmark Problem (Exhibit 18.11)
B. Implications of the Benchmark Problems
C. Required Characteristics of Benchmarks
1. Unambiguous
2. Investable
V. Evaluation of Bond Portfolio Performance
Return-Based Performance Measurement: Fama French’s three factor model expanded to
include two additional risk factors: Term Premium and Default Premium (Exhibit 18.12)
VI. Reporting Investment Performance