Evaluation of portfolio

performance and
evaluation

Compiled and edited by;

Dr. Sally Amer
introduction

• The portfolio performance evaluation primarily refers to the

determination of how a particular investment portfolio has
performed relative to some comparison benchmark.

• The evaluation can indicate the extent to which the portfolio has
outperformed or under-performed, or whether it has performed
equal to the benchmark.
The evaluation of portfolio performance is
important for several reasons.
First, the investor, whose funds have been invested in the portfolio, needs to
know the relative performance of the portfolio.

The performance review must generate and provide information that will help
the investor to assess any need for rebalancing of his investments.

Second, the management of the portfolio needs this information to evaluate the
performance of the manager of the portfolio and to determine the manager’s
compensation, if that is tied to the portfolio performance.
Performance evaluation methods

• Performance evaluation methods generally fall into two categories, namely conventional and
risk-adjusted methods.

• The most widely used conventional methods include benchmark comparison and style
comparison.

• The risk-adjusted methods adjust returns in order to take account of differences in risk levels
between the managed portfolio and the benchmark portfolio.

• The major methods are the Sharpe ratio, Treynor ratio, Jensen’s alpha, Modigliani and
Modigliani, and Treynor Squared.
Conventional Methods
1- Benchmark Comparison
• The most straightforward conventional method involves comparison of the
performance of an investment portfolio against a broader market index.
• The most widely used market index in Egypt is The EGX 30 Index, The EGX
30 Index is a major stock market index which tracks the performance of 30
most liquid stocks traded on the Egyptian Exchange.

• It is a free-float capitalization weighted index is a method of calculating

the market capitalization of a stock market index's underlying companies.
Style Comparison

• A second conventional method of performance evaluation called ”style-

comparison” involves comparison of return of a portfolio with that having a similar
investment style. While there are many investment styles, one commonly used approach
classifies investment styles as value versus growth.

• The ”value style” portfolios invest in companies that are considered undervalued on the basis
of yardsticks such as price-to-earnings and price-to-topic value multiples.

• The ”growth style” portfolios invest in companies whose revenue and earnings are expected
to grow faster than those of the average company.
Style Comparison

• In order to evaluate the performance of a value-oriented portfolio, one would compare the
return on such a portfolio with that of a benchmark portfolio that has value-style.

• Similarly, a growth-style portfolio is compared with a growth-style benchmark index.

• This method also suffers from the fact that while the style of the two portfolios that are
compared may look similar, the risks of the two portfolios may be different.

• Also, the benchmarks chosen may not be truly comparable in terms of the style since there
can be many important ways in which two similar style-oriented funds vary.
Risk-adjusted Methods

• The risk-adjusted methods make adjustments to returns in order to

take account of the differences in risk levels between the managed
portfolio and the benchmark portfolio.

• While there are many such methods, the most notables are the
Sharpe ratio (S), Treynor ratio (T), Jensen’s alpha (a), Modigliani and
Modigliani (M2), and Treynor Squared (T2).
How Is a Company's Share Price Determined?

• Generally speaking, the stock market is driven by supply and

demand, much like any market. When a stock is sold, a buyer and
seller exchange money for share ownership. The price for which
the stock is purchased becomes the new market price. When a
second share is sold, this price becomes the newest market price,
etc.
How Is a Company's Share Price Determined?
• The more demand for a stock, the higher it drives the price and vice
versa.
• The more supply of a stock, the lower it drives the price and vice versa.
So while in theory, a stock's initial public offering (IPO) is at a price equal
to the value of its expected future dividend payments, the stock's price
fluctuates based on supply and demand.
• Many market forces contribute to supply and demand, and thus to a
company's stock price.
How to calculate the stock profit?

• The main idea behind this stock return calculator is that you buy stocks
when they are cheap, and sell them once their value increases.
• The profit is the difference between the expenses and revenue.
• You can calculate it according to the following formula:
• Profit = [(SP * No) - SC] - [(BP * No) + BC]
How to calculate the stock profit?
• SP stands for selling stock price,
• No is the number of stocks you trade,
• SC is the selling commission that you have to pay,
• BP is the buying stock price, and
• BC is the buying commission.
• This stock investment calculator accepts commissions expressed both as
fixed monetary values and as a percentage of the price.
• Once you type in one of these two values, the other one will be
calculated automatically.
When should I sell my stocks?
• Last but not least, this stock price calculator gives you a clear indication
of when you should refrain from selling your stocks.
• If the price is lower than the break-even price, every selling transaction
will only bring you losses.
• That's why it's essential to sell your stocks only if the price exceeds this
value.
• To calculate the break even price, use the equation below:
• Break even =[(BP * No) + BC] / [No * (1 - SC%)]
• where SC% is the selling commission expressed as a percentage of the
selling price.
When to sell stocks / investments?

• We will explore three considerations when you should consider

selling your stock:
• When the business financial strength is diminished
• When the primary assumption for the company to grow (investing
thesis) is no longer valid.
• When the company faces accounting scandals.