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
o Sharpe Portfolio Performance Measure
Seeks to measure the total risk of a portfolio, not just the level of
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
Linked to the CML.
o Applying the Jensen Measure
Requires using a different RFR for each time interval during the
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