W. Sean Cleary
Charles P. Jones
Analysis and Management
Second Canadian Edition

• Outline the framework for evaluating portfolio performance.
• Use measures of return and risk to evaluate portfolio performance.
• Distinguish between the three composite measures of portfolio performance.
• Discuss problems with portfolio measurement.

• “Bottom line” issue in investing
• Is the return after all expenses adequate compensation for the risk?
• What changes should be made if the compensation is too small?
• Performance must be evaluated before answering these questions

• Without knowledge of risks taken, little can be said about performance
 Intelligent decisions require an evaluation of risk and return
 Risk-adjusted performance best
• Relative performance comparisons
 Benchmark portfolio must be legitimate alternative that reflects objectives

• Evaluation of portfolio manager or the portfolio itself?
 Portfolio objectives and investment policies matter
• Constraints on managerial behaviour affect performance
• How well-diversified during the evaluation period?
 Adequate return for diversifiable risk?

• Change in investor’s total wealth over an evaluation period
R p
= (V
E
- V
B
)/V
B
V
E
= ending portfolio value
V
B
= beginning portfolio value
• Assumes no funds added or withdrawn during evaluation period
 If not, timing of flows important

• Dollar-weighted returns
 Captures cash flows during the evaluation period


Equivalent to internal rate of return
Equates initial value of portfolio (investment) with cash inflows or outflows and ending value of portfolio
 Cash flow effects make comparisons to benchmarks inappropriate

• Time-weighted returns
 Captures cash flows during the evaluation period and permits comparisons with benchmarks


Calculate a return relative for each time period defined by a cash inflow or outflow
Use each return relative to calculate a compound rate of return for the entire period

• Dollar- and Time-weighted Returns can give different results
 Dollar-weighted returns appropriate for portfolio owners
 Time-weighted returns appropriate for portfolio managers
• No control over inflows, outflows
• Independent of actions of client

• Risk differences cause portfolios to respond differently to market changes
• Total risk measured by the standard deviation of portfolio returns
• Systematic risk measured by a security’s beta
 Estimates may vary, be unstable and change over time

Total Risk
Unsystematic risk
Market risk
Number of
Securities

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