Page 321 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes In the above illustration, we have calculated the portfolio returns by taking the price changes of
all individual stocks during the holding period. If we get the net ending value of a portfolio as
less than the beginning value, then the portfolio return would be negative.
As we have seen earlier, all mutual funds are specially designed portfolios. The returns from
such portfolios are calculated by considering the Net Asset Values (NAVs) of each of these funds,
rather than the changes in market prices of all stocks constituting the given portfolio. Then, the
portfolio returns (fund returns) are given by

NAV - NAV
R = t t-i
F NAV
t-i
Performance measurement is just an accounting function that attempts to reconcile the end of
period with the beginning period values. Performance evaluation on the other hand, addresses
the issues of whether:
1. the past performance was superior or inferior
2. such performance was due to skill or luck
3. future performance will be similar or not
Portfolio performance is generally evaluated over a time interval of at least four years, with
returns for a number of sub-periods within the interval, like monthly or quarterly, so that there
is a fairly adequate number of observations for statistical evaluation. The calculation of portfolio
return is fairly simple when there are no deposits or withdrawals of money from a portfolio
during a time period. In that case, the market value of the portfolio in the beginning and at the
end of the given period is determined for computing the portfolio return.

Example:
Step 1: Portfolio Value – Beginning

Shares No. of Shares Market Price Portfolio Value Beginning
A 50 100 5,000
B 100 70 7,000

C 200 40 8,000
D 500 60 30,000
Total (V o) 50,000

Step 2: Portfolio Value – End
Shares No. of Shares Market Price Portfolio Value End

A 50 100 10,000
B 100 40 4,000
C 200 110 22,000
D 500 80 40,000
Total (V o) 76,000

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