Professional Documents
Culture Documents
Evaluation
1 rG
1 r1 1 r2 ...1 rn
Dollar-Weighted Returns
Internal rate of return considering the cash flow to and from
investment
Returns are weighed by the amount invested in each period.
Cn
C1
C2
PV
...
1
2
n
1 r 1 r
1 r
Example
51
112
50
1
(1 r ) (1 r ) 2
r 7.117%
Example
Time Weighted Return
53 50 2
r1
10%
50
54 53 2
r2
5.66%
53
rG = [ (1.1) (1.0566) ]1/2 1 = 7.81%
The dollar-weighted average is less than the time-
(rP rF )
P
rp = Average return on the portfolio
rf = Average risk free rate
P = Standard deviation of portfolio return
Assumptions needed (same as during portfolio
optimization)
M2 Measure
It can be hard to interpret Sharpe Measure. If one
M rP* rM
2
Is P better or Q?
Is P better or Q
rp
Mispriced assets-review
When choosing the weight of a portfolio of mispriced
( eH )
o
wH
E ( RM )
2M
The improvement in Sharpe ratio of the total
portfolio is:
H
S S
(
e
)
H
2
P
2
M
P
( eP )
Is P better than Q?
Market Timing
Imagine the fund manager is fully invested in a risk-
Characteristic Line
Characteristic Line is the equation of the line for the
rM rf
rP rf a b(rM rf ) c (rM rf ) D eP
rP rf
rM rf
markets.
c needs to be positive for an indication of superior timing
ability.
rP rf a b(rM rf ) c(rM rf ) eP
2
rP rf
rM rf
Performance attribution
In this case we are trying to attribute performance to
rB wBi rBi
i 1
Performance attribution
The fund manager will choose weights in each asset
rp w pirpi
i 1
i 1
i 1
i 1