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Lecture

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Department
Administrative Studies
Course Code
ADMS 3531
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Personal Investment Management
ADMS 3531 - Fall 2011 – Professor Dale Domian
Lecture 8 Part 2 – Performance Evaluation and Risk Management – Nov
8
Chapter 13 Outline
-Active and passive portfolio management.
-Performance evaluation.
-Comparing performance measures.
-Investment risk management.
-More on computing value-at-risk.
Performance Evaluation and Risk Management
-Our goals in this chapter are to learn methods of:
oEvaluating risk-adjusted investment performance; and
oAssessing and managing the risks involved with specific investment strategies.
Performance Evaluation
-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:
oThe raw return has no adjustment for risk.
oThe 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 reward-to-risk ration that focuses on total risk.
oIt is computed as a portfolios risk premium divided by the standard deviation for
the portfolio’s return.
-The Treynor ratio is a reward-to-risk ratio that looks at systematic risk only.
oIt is computed as a portfolios risk premium divided by the portfolios beta
coefficient.
-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’.

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Description
Personal Investment Management ADMS 3531 ­ Fall 2011 – Professor Dale Domian Lecture 8 Part 2 – Performance Evaluation and Risk Management – Nov  8 Chapter 13 Outline ­ Active and passive portfolio management.  ­ Performance evaluation. ­ 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. Performance Evaluation ­ 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  coefficient. ­ 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  predicted
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