PORTFOLIO EVALUATION

• Evaluation of the performance of the investment

portfolio
• Process of comparing the return earned on a
portfolio with the return earned on one or more
other portfolio or on a benchmark portfolio
Functions Of Portfolio Performance
Evaluation
Portfolio performance evaluation essentially
comprises of two functions
Performance Measurement
Performance Evaluation
Portfolio Performance Evaluation Methods
Sharpe’s Measure index
• The Sharpe ratio, also known as the Sharpe index or the
reward-to-variability ratio,
• Sharpe ratio is a financial metric used to measure the
performance of an investment compared to a risk-free
asset, taking into account its risk.
• In simpler terms, it helps you determine how much extra
return you get for taking on additional risk.
 Sharpe Ratio =
where:
Rp ​= Return of Portfolio
Rf ​= Risk-Free Rate
σp​ = Standard Deviation Of The Portfolio’s Excess Return​
(or)

​Sharpe Ratio =
1) The following information is provided regarding the
performance of the funds namely Birla Advantage, Sundaram
Growth and Sun F & C Value for a period of six months ending
August 1999. The risk free rate of interest is assumed to be 9.
Rank them with the help of Sharpe Index and discuss.

Rp​ σp​

Birla Advantage 25.38 4

Sundaram Growth 25.11 9.01

Sun F & C Value 25.01 3.55

Solution
Sharpe Ratio =

Birla Advantage = = 4.095 I

Sundaram Growth = = 1.788 III
Sun F & C Value = = 4.509 II

The Birla Advantage fund ranks top among the three funds because of
the higher return and low volatility in return. The Sundaram Growth
fund's return is high compared to Sun's but the high volatility in return
has made it to be ranked third.
Let’s assume that you want to compare two different mutual funds in
your portfolio with different risk levels. Obviously, the more risky of
the two will tend to have higher returns, but which one has a higher
return relative to the risk associated with the investment? Let’s use the
Sharpe ratio to see which one is performing better.
• Investment #1
 Portfolio return: 20%
 Risk free rate: 10%
 Standard Deviation: 5
• Investment #2
 Portfolio return: 30%
 Risk free rate: 10%
 Standard Deviation: 40
Treynor Ratio
• The Treynor Ratio, also known as the Reward-to-Volatility Ratio
• Treynor Ratio is a performance metric used to assess the risk-adjusted
return of an investment.
• It calculates the amount of excess return generated by an investment
for each unit of systematic risk taken.
​Treynor Ratio =
where:
Rp​= Return of Portfolio
Rf ​= Risk-Free Rate
p​= Beta Of The Portfolio’s Excess Return​

(or)

​Treynor Ratio =
The following information is provided regarding the performance of the
funds namely Birla Advantage, Sundaram Growth and Sun F & C Value
for a period of six months ending August 1999. The risk free rate of
interest is assumed to be 9. Rank them with the help of Sharpe Index
and discuss.

Rp​ σp​
Birla Advantage 25.38 4 .23
Sundaram Growth 25.11 9.01 .56

Sun F & C Value 25.01 3.55 .59

Solution
Treynor Ratio=

Birla Advantage = = 71.21 I

Sundaram Growth = = 28.77 II
Sun F & C Value = = 27.14 III

The Birla Advantage fund ranks top among the three funds because of
the higher return and low volatility in return. The Sundaram Growth
fund's return is high compared to Sun's but the high volatility in return
has made it to be ranked third.
Mr. Anand is having units in a mutual fund for the past three years. He
wants to evaluate its performance by comparing it to the market.

fund market
Return 70.60 41.40
Standard deviation 41.31 19.44
Risk free return 12% 12%
Beta 1.12 1
Solution
Treynor Ratio=

Fund = = 52.3

Market = = 29.4
Jensen ratio
• Jensen's alpha is a measure of the excess returns earned on an
investment or a portfolio compared to the gains estimated by the
capital asset pricing model (CAPM).
• It is a risk-adjusted performance measure that represents the average
return on a portfolio or investment, above or below that predicted by
the CAPM, given the portfolio's or investment's beta and the average
market return.
Formula
αp = Rp – {Rf + (Rm – Rf)}
Where:

Rp = The returns generated by the portfolio

Rf = The risk-free rate

= The portfolio’s beta (or) systematic risk

Rm = The expected market return

1) Mr. X has been owning units from three different mutual funds
namely R. S. and T. The following particulars are available to him. He
wants to dispose any one of the mutual fund for his personal
expenditure. Which fund should he dispose
Fund Excess Return Beta
R 7.7 1.02
S 11.3 0.99
T 11.6 1.07
Market 7.8 1.00
Solution
αp = Rp – {Rf + (Rm – Rf)}
Portfolio R
= 7.7-1.02 x 7.8
= -.256
Portfolio S
= 11.3-.99 x 7.8
= 3.578
Portfolio T
= 11.6-1.07 x 7.8
= 3.254