BU473 Lecture Notes - Lecture 11: Sharpe Ratio, Discounted Cash Flow, Behavioral Economics
This preview shows page 1. to view the full 4 pages of the document.
BU-473 Lecture 13
• Objective evaluation is important as it helps to overcome behavioral biases and make correct
• Behavioral finance – biases in investing
Rate of Return
• Simplest measure of portfolio performance
• Arithmetic average of holdings period returns:
Geometric Returns: Time-Weighted Average
• Time weighted returns treat every period of the portfolio as equal
• A common time-weighted return measure is the geometric average
IRR: Dollar-Weighted Average
• This approach treats every dollar invested according to a discounted cash flow approach
• Simplest and most common measure of risk-adjusted return is the Sharpe ratio, which we have
encountered several times in this course already.
• We’ve used the Sharpe ratio for a few different things:
o Defining an individual portfolio’s Capital Allocation Line.
o Finding the optimal tangency portfolio and market portfolio.
o Defining the market portfolio’s Capital Markets Line.
• The realized Sharpe ratio of a portfolio given by:
• On its own, Sharpe ratio is difficult to interpret
You're Reading a Preview
Unlock to view full version