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Chapter 13

CFIN501- Chapter 13- Performance Evaluation And Risk Management.docx

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Ryerson University
FIN 501
Edward Blinder

CFIN501 Chapter 13 Performance Evaluation And Risk ManagementActive And Passive Portfolio ManagementPassive managementdo not change the composition of their portfoliooBuy and hold strategy involves buying financial instrumentsForming the portfolio and then holding the chosen securities in the original percentage of the portfolioNot changing the composition of the portfoliooBuying shares of the market index fund that mimics a market index and holding itInvestors do not pay transactions fees for frequent buying and sellingDo not spend a lot of time gathering information to find underpriced securitiesActive managementchanging the composition of portfoliosoMarket timing strategy Mutual fund managersVarious techniques and predicting future movements in financial instrumentsstocks and buying and selling them at the right timeAdvocate moving into a stock market or an industry at a particular timeoFind undervalued and overvalued securitiesbuy the undervalued ones and sell short the overvalued ones to try to obtain abnormal profitsoCostly time consuming and riskyoInvestors need to evaluate managers of actively managed funds to find out whether to not their strategies are successfuloSharpe ratio treyor ratio and all the other risk measures are important Performance Evaluation Natural interest in how well particular investments have donePerformance evaluationassessment of how well a money manager achieves a balance between high returns and acceptable risksPerformance Evaluation MeasuresBest know and most popular measures Sharpe Ratio Treynor ratio Jensens alpha and 2M measureRaw return R states the total percentage return on an investment with no adjustment pfor risk or comparison to any bench markoDoes not reflect any consideration of risk suggests that its usefulness is limited when making investment decisionsThe Sharpe RatioSharpe ratiomeasures investment performance as the ratio of portfolio risk premium over portfolio return standard deviation RRPfSharperatiopReturn standard deviation is measure of the total risk for a security or a portfolioReward to risk ratio that focuses on total riskTotal risk is used to make the adjustmentSharpe ratio is probably most appropriate for evaluating relatively diversified portfolioMeasures whether or not a portfolio produces extra return over the risk free rateoNegative Sharpe ratioportfolio fails to earn a return above and beyond the risk free rateRatio ranks the portfolio according to their portfolio risk level by dividing the extra return to standard deviationInvestors expect higher risk portfolios to earn higher returnsoPortfolios with high Sharpe ratios are managed wellThe Treynor RatioTreynor ratiomeasures investment performance as the ratio of portfolio risk premium over portfolio betaRRPfTreynoeratiopReward to risk ratio1
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