Performance Evaluation and Active Portfolio Management(-45)

1、Performance Evaluation and Active Portfolio ManagementCHAPTER 17IntroductionComplicated subjectTheoretically correct measures are difficult to constructDifferent statistics or measures are appropriate for different types of investment decisions or portfoliosMany industry and academic measures are di

2、fferentThe nature of active managements leads to measurement problemsAbnormal Performance What is abnormal? Abnormal performance is measured:Comparison groupsMarket adjustedMarket model / index model adjustedReward to risk measures such as the Sharpe Measure:E (rp-rf) / spFactors That Lead to Abnorm

3、al PerformanceMarket timingSuperior selectionSectors or industriesIndividual companiesComparison GroupsSimplest methodMost popularCompare returns to other funds with similar investment objectivesFigure 17-1 Universe Comparison Periods Ending December 31, 2003Risk Adjusted Performance: Sharpe 1) Shar

4、pe Indexrp - rfrp = Average return on the portfolio rf = Average risk free ratep= Standard deviation of portfolio returnpssRisk Adjusted Performance: Treynor 2) Treynor Measurerp - rfprp = Average return on the portfolio rf = Average risk free ratep = Weighted average b for portfolio = rp - rf + p (

5、 rm - rf) 3) Jensens Measurepprp = Average return on the portfoliop = Weighted average Betarf = Average risk free raterm = Avg. return on market index port. Risk Adjusted Performance: Jensen= Alpha for the portfolioaaM2 MeasureDeveloped by Modigliani and ModiglianiEquates the volatility of the manag

6、ed portfolio with the market by creating a hypothetical portfolio made up of T-bills and the managed portfolioIf the risk is lower than the market, leverage is used and the hypothetical portfolio is compared to the marketM2 Measure: ExampleManaged Portfolio Market T-billReturn35% 28% 6%Stan. Dev42%

7、30% 0%Hypothetical Portfolio: Same Risk as Market30/42 = .714 in P (1-.714) or .286 in T-bills(.714) (.35) + (.286) (.06) = 26.7%Since this return is less than the market, the managed portfolio underperformedFigure 17-2 The M2 of Portfolio PT2 (Treynor Square) MeasureUsed to convert the Treynor Meas

8、ure into percentage return basisMakes it easier to interpret and compareEquates the beta of the managed portfolio with the markets beta of 1 by creating a hypothetical portfolio made up of T-bills and the managed portfolioIf the beta is lower than one, leverage is used and the hypothetical portfolio

9、 is compared to the market T2 ExamplePort. P.MarketRisk Prem. (r-rf) 13% 10%Alpha 5% 0%Treynor Measure 16.25 10Weight to match Market w = bM/bPAdjusted Return RP* = w (RP) = 16.25%T2P = RP* - RM = 16.25% - 10% = 6.25%Figure 17-3 Treynor Square MeasureWhich Measure is Appropriate? It depends on inves

10、tment assumptions1) If the portfolio represents the entire investment for an individual, Sharpe Index compared to the Sharpe Index for the market.2) If many alternatives are possible, use the Jensen a or the Treynor measureThe Treynor measure is more complete because it adjusts for riskLimitationsAs

11、sumptions underlying measures limit their usefulnessWhen the portfolio is being actively managed, basic stability requirements are not metPractitioners often use benchmark portfolio comparisons to measure performanceFigure 17-4 Portfolio ReturnsPerformance AttributionDecomposing overall performance

12、into componentsComponents are related to specific elements of performanceExample componentsBroad AllocationIndustrySecurity ChoiceUp and Down MarketsProcess of Attributing Performance to Components Set up a Benchmark or Bogey portfolioUse indexes for each componentUse target weight structureCalculat

13、e the return on the Bogey and on the managed portfolioExplain the difference in return based on component weights or selectionSummarize the performance differences into appropriate categoriesProcess of Attributing Performance to ComponentsTable 17-3 Performance of the Managed PortfolioTable 17-4 Per

14、formance AttributionTable 17-5 Sector Allocation Within the Equity MarketTable 17-6 Portfolio Attribution SummaryLure of Active Management Are markets totally efficient?Some managers outperform the market for extended periodsWhile the abnormal performance may not be too large, it is too large to be

15、attributed solely to noiseEvidence of anomalies such as the turn of the year exist The evidence suggests that there is some role for active managementMarket TimingAdjust the portfolio for movements in the marketShift between stocks and money market instruments or bondsResults: higher returns, lower

16、risk (downside is eliminated)With perfect ability to forecast behaves like an optionrfrfrMRate of Return of a Perfect Market TimerWith Imperfect Ability to ForecastLong horizon to judge the abilityJudge proportions of correct callsBull markets and bear market callsMarket Timing & Performance Measure

17、ment Adjusting portfolio for up and down movements in the marketLow Market Return - low etaHigh Market Return - high etaFigure 17-6 Characteristic Lines Style AnalysisIntroduced by Bill SharpeExplaining percentage returns by allocation to styleStyle Analysis has become popular with the industryFigur

18、e 17-7 Fidelity Magellan Fund Difference Fund versus Style Benchmark Figure 17-8 Fidelity Magellan Fund Difference Fund versus S&P 500Figure 17-9 Average Tracking Error of 636 Mutual Funds, 1985 - 1989Morning Stars Risk Adjusted RatingSimilar to mean Standard Deviation rankingsCompanies are put into

19、 peer groupsStars are assigned1-lowest5-highestHighly correlated to Sharpe measuresFigure 17-10 Rankings Based on Morningstars RARs and Excess Return Sharpe RatiosSuperior Selection AbilityConcentrate funds in undervalued stocks or undervalued sectors or industriesBalance funds in an active portfoli

20、o and in a passive portfolioActive selection will mean some unsystematic riskTreynor-Black Model Model used to combine actively managed stocks with a passively managed portfolioUsing a reward-to-risk measure that is similar to the the Sharpe Measure, the optimal combination of active and passive por

21、tfolios can be determinedTreynor-Black Model: AssumptionsAnalysts will have a limited ability to find a select number of undervalued securitiesPortfolio managers can estimate the expected return and risk, and the abnormal performance for the actively-managed portfolioPortfolio managers can estimate the expected risk and return parameters