Personal Investment Management
ADMS 3531 Fall 2011 – Professor Dale Domian
Lecture 8 Part 2 – Performance Evaluation and Risk Management – Nov
Chapter 13 Outline
Active and passive portfolio management.
Comparing performance measures.
Investment risk management.
More on computing valueatrisk.
Performance Evaluation and Risk Management
Our goals in this chapter are to learn methods of:
o Evaluating riskadjusted investment performance; and
o Assessing and managing the risks involved with specific investment strategies.
Can anyone consistently earn an ‘excess’ return, thereby ‘beating’ the market?
Performance evaluation is a term for assessing how well a money manager achieves a
balance between high returns and acceptable risks.
Performance Evaluation Measures
The raw return on a portfolio is simply the total percentage return on a portfolio.
The raw return is a naïve performance evaluation measures because:
o The raw return has no adjustment for risk.
o The raw return is not compared to any benchmark or standard.
Therefore, the usefulness of the raw return on a portfolio is limited.
The Sharpe ratio is a rewardtorisk ration that focuses on total risk.
o It is computed as a portfolio’s risk premium divided by the standard deviation for
the portfolio’s return.
The Treynor ratio is a rewardtorisk ratio that looks at systematic risk only.
o It is computed as a portfolio’s risk premium divided by the portfolio’s beta
Jensen’s alpha is the excess return above or below the security market line. It can be
interpreted as a measure of how much the portfolio ‘beat the market’. o It is computed as the raw portfolio return less the expected portfolio return as