Page 259 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Performance Index

Portfolio performance evaluation is a component of the portfolio management process.
Specifically, it can be viewed as a feedback and control mechanism that identifies superior
performance and makes the investment management process successful. Superior performance
of a portfolio may have been the result of good portfolio management decisions/styles or due
to chance. Conversely, inferior performance of a portfolio could also be attributed to a chance
factor or due to costs associated with unscientific portfolio management.
Portfolio performance is evaluated over a specific time-period. The most often used risk adjusted
portfolio performance measures are the:
1. Sharpe's Portfolio Performance Measure;
2. Treynor Portfolio Performance Measure; and

3. Jensen Portfolio Performance Measure.

9.9 Summary

Every strategy has certain performance implications.
The word strategy implies a conscious effort to achieve stated goals. Their concern is to at
least meet their minimum acceptable return levels without taking excessive risk.
They want a comfortable and stress-free retirement.
The asset-allocation design will determine results in both short- and long-term periods.
What's more, both risk and returns will be driven far more by asset allocation than stock
selection or market timing.
The asset allocation decision refers to the allocation of portfolio assets to broad asset
markets; in other words, how much of the portfolio's funds are to be invested in stocks,
how much in bonds, money market assets, and so forth.
Each weight can range from 0% to 100%.
Examining the asset allocation decision globally leads us to ask the following questions:
What percentage of portfolio funds is to be invested in each of the countries for which
financial markets are available to investors? Within each country, what percentage of
portfolio funds is to be invested in stocks, bonds, bills, and other assets? Within each of the
major asset classes, what percentage of portfolio funds is to go into various types of bonds,
exchange-listed stocks versus over-the-counter stocks, and so forth?
Value investing is termed as conservative investing. In the case of value investing, bargains
are often measured in terms of market prices that are below the estimated current economic
value of tangible and intangible assets.
The strategy of growth investors is to identify the shares whose future returns are expected
to grow at a fast rate.

Growth investment style identifies shares based on the growth potential of companies.
These types of investors look into the future potential returns from the company.
Historical returns need not exhibit a close relationship with growth rate or historical
earnings per share.

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