Group Members Roll no

Abhi Jain 103

Rajesh Chaurasia 105
Anil Agarwal 106
Tannavi Rani 107
Kundan Thakur 108
 Portfolio evaluation is the process of measuring and
comparing the returns(actually) earned on a
portfolio with the returns(estimates) for a
benchmark portfolio.

 The portfolio identifies whether the performance of

a portfolio has been superior or inferior to other
portfolios.
 Risk Return Trade Off: Risk and return are two sides
of the same coin. The performance evaluation should
be based on both and not on either of them.

 Appropriate Market Index: The performance of one

portfolio is benchmarked either against some other
portfolio or against some carefully selected market
index. Like performance of MF schemes may be
benchmarked against performance of SENSEX.

 Common Investment Time Horizon: Investment

period horizon of the portfolio being evaluated and the
time horizon of the benchmark must be same.
 Return per unit of risk: An obvious way to
look at the performance of portfolio is to find
out reward per unit of risk undertaken.
(a) Sharpe Ratio : It is also called Reward to
variability ratio. The risk is measured in terms
of standard deviation.

Sharpe Ratio = Rp – Irf

S.D portfolio
 The sharpe Index measures the risk premium of
the portfolio relatives to total amount of risk in
the portfolio.
 The larger the index value, the better the

portfolio has performed.

(b) Treynor ratio: This ratio is also called Reward
to risk ratio. The risk is measured by the beta of
the portfolio.

Treynor Ratio = Rp – Irf

Beta portfolio
 The treynor index measures the risk premium of
the portfolio where the risk permium is the
difference between the return and the risk free
rate.

NOTE: Sharpe ratio adjust the portfolio return for

systematic as well as unsystematic risk.

Differential Return: This measures is based on

differential returns and is known as Jensen’s
ratio. It is based on CAPM.
 CAPM = Irf + (Rm – Irf)β
i.e Expected return of the portfolio

So, Differential return is denoted by symbol αp.

αp = Rp – Expected return of portfolio.
 Portfolio X Portfolio Y
Risk free rate 8% 8%
Market return 14% 14%
β 1.2 0.5
Risk Premium 13% 12%
Expected return of 15.2% 11%
portfolio
Jensen’s ratio -2.2% 1%

Expected return of portfolio = Irf + (Rm – Irf)β

αp = Rp – Expected return of portfolio.

 If alpha portfolio is +ve it shows that the
portfolio has performed better and it has out
performed the market.
 If alpha portfolio is –ve, it means that the
portfolio has underperformed as compared to
the market.
 If alpha portfolio is zero, it indicates that it has
just performed what it is expected for.