Portfolio Performance Evaluation
Many individuals start buying stocks and bonds and like magic feel like they've created a portfolio. An individual acquires assets and the porfolio morphs over time to meet some specified goals. Investments ar etypically made with the expectation that there will some kind of return realized on the invested assets. A critical question that individuals need to constantly ask is 'how am i doing?'. Understanding that you had an 11% return doesnt actually explain or provide an understanding if this is a good return. Understanding portfolio return needs a basis for comparison.
There are 3 techniques that have been developed to measure portfolio performance. These measures are sometimes known as 'composit performance measures'. These measures are:
Each of these measures is named after the developer of the index. Each of these analysis' address 2 important issues:
1 - what is the benchmark of the aggregate market that you are comparing performance to
2 - how do you adjust the realized return for the associated portfolio risk.
It goes without saying that there should be a premium on the return on riskier portfolios. There has to be a measure to determine how that risk factors into your analysis. Please review the information on each of these calculation methods, each containing an example.
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