Page 320 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 13: Portfolio Performance Evaluation

generate a rate of return almost similar to the size of return that market yields on efficient Notes
portfolios. These specialised institutions are able to invest across different industries and different
securities with the available large amounts of money entrusted to them by investors. This
facilitates the obtainment of fuller benefits of diversification. Further, the myriad schemes in
mutual funds throw up opportunities to suit to the varied requirements of different investors.
This lesson examines the performance of a portfolio manager in investing the funds entrusted to
a mutual fund. Such an evaluation is important to an investor in different directions.
1. It enables the investor to appraise how well the portfolio manager has achieved the
targeted return.

2. It enables the investor to examine how well the manager has achieved the targets in
comparison to other mutual funds.
3. It enables the fund authorities to evaluate the performance of their investment decisions
not only earning a specified rate of return, but return in relative terms i.e. per unit of risk.

13.1 Methods of Calculating Portfolio Returns

Calculation of portfolio returns is almost similar to the calculation of rate of return on individual
stock. The rate of return is generally estimated for a specific holding period. The performance of
a portfolio fund is evaluated on the returns generated over a timeframe, with number of sub-
periods, by considering the holding periods. The calculation of portfolio return is relatively
easy when there are no additions or withdrawals from the initial corpus during the given
phenomena.

Example: The portfolio returns can be calculated as illustrated in the following example.
Portfolio Composition: (Beginning)

Scrip No. of shares Market price at Portfolio value
beginning at beginning
Alpic Finance 100 93 9,300
Ashok Leyland 50 70 3,500
Ballarpur Industries 100 150 15,000
CIPLA 50 221 11,050
Federal Bank 200 156 31,200
Po 70,050

Portfolio Value at the End of Holding Period

Scrip No. of shares Market price Portfolio value at
at end the end
Alpic Finance 100 120 12,000
Ashok Leyland 50 122 6,100
Ballarpur Industries 100 164 16,400
CIPLA 50 358 17,900
Federal Bank 200 160 32,000
P 84,400

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