Page 333 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 13.5 Summary

Whenever an investor employs resources, be it in the form of hiring employees for his
company, establishing a charitable fund or investing money in an investment fund he will
want to measure the performance of his investment.

In any of the above named cases the investor will establish an evaluation system that
provides him with the feedback needed to determine whether the investment generates
the predetermined utility.
The investment manager will be bound to the investment policy and subject to a constant
evaluation of his achievements.
His achievement will be the return on the capital the investor provided.

The first question the investor will want to address is the question of performance.
What is good and what is poor performance and where is the line in between - the
benchmark - and what to take as the benchmark.
We have examined the issues associated with portfolio evaluation by constructing simple
model of NAV and Dollar-Weighted Rate of Return; methods of computing portfolio
return viz. Value-Weighted Return and Risk-adjusted Rate of Return.

We have also distinguished between performance measurement and performance
evaluation and highlighted the primary components of performance namely stock selection
and market timing and also the concepts and method of construction of a benchmark
portfolio for comparison and evaluation with a managed portfolio.
And further, a detailed discussion is provided on risk-adjusted methods like Sharpe
Treynor and Jensen's Measures. In addition a focus is made on the performance determinants.
13.6 Keywords

Benchmark Portfolio: A tool for the meaningful evaluation of the performance of a portfolio
manager.

Jensen's Measure: It is an absolute measure of performance, adjusted for risk.
The Sharpe Measure: It evaluates the portfolio manager on the basis of both rate of return and
diversification.

13.7 Self Assessment

Fill in the blanks
1. ................ analysis, is a means of evaluating an investment manager's performance, the
return and the sources of return relative to a benchmark portfolio.

2. Specialized benchmarks are called ................ portfolios.
3. Portfolio managers can also achieve superior performance by picking up ................ beta
stocks during a market upswing.

4. If a portfolio is constructed by concentrating on stock selection rather than keeping the
market timing in mind, the average beta of the portfolio stands fairly ................

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