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Administrative Studies
ADMS 4501
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Advanced Portfolio Management ADMS 4501 – Winter 2012 – Lois King Lecture 11 – Chapter 18 – Evaluation of Portfolio Performance – Mar 22 Evaluation of Portfolio Performance - Peer group comparisons o Collects the returns produced by a representative universe of investors over a specific period of time. o Potential problems  No explicit adjustment for risk.  Difficult to form comparable peer group. - Risk-adjusted performance measures o Treynor portfolio performance measure  Builds on capital markets theory (include CAPM)  Assumes a completely diversified portfolio leaving systematic risk as the relevant risk.  Focuses on the portfolio’s undiversifiable risk: market or systematic risk. o Sharpe Portfolio Performance Measure  Seeks to measure the total risk of a portfolio, not just the level of systematic risk.  Shows the risk premium earned over the risk free rate per unit of standard deviation (or total risk).  Sharpe ratios greater than the ratio for the market portfolio indicate superior performance.  Linked to the CML. o Applying the Jensen Measure  Requires using a different RFR for each time interval during the sample period.  Does not directly consider portfolio manager’s ability to diversify because it calculates risk premiums in terms of systematic risk (similar to the Treynor measure).  Flexible enough to allow for alternative models of risk and expected return than the CAPM. Risk-adjusted performance can be computed relative
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