Chapter 19Performance Evaluation.ppt

Chapter 19Performance Evaluation And with that they clapped him into irons and hauled him off to the barracks. There he was taught “right turn,” “left turn,” and “quick march,” “slope arms,” and “order arms,” how to aim and how to fire, and was given thirty strokes of the “cat.” Next day his performance on parade was a little better, and he was given only twenty strokes. The following day he received a mere ten and was thought a prodigy by his comrades. - From Candide by Voltaire Outline Introduction Importance of measuring portfolio risk Traditional performance measures Performance evaluation with cash deposits and withdrawals Performance evaluation when options are used Introduction Performance evaluation is a critical aspect of portfolio management Proper performance evaluation should involve a recognition of both the return and the riskiness of the investment Importance of Measuring Portfolio Risk Introduction A lesson from history: the 1968 Bank Administration Institute report A lesson from a few mutual funds Why the arithmetic mean is often misleading: a review Why dollars are more important than percentages Introduction When two investments’ returns are compared, their relative risk must also be considered People maximize expected utility: A positive function of expected return A negative function of the return variance A Lesson from History The 1968 Bank Administration Institute’s Measuring the Investment Performance of Pension Funds concluded: Performance of a fund should be measured by computing the actual rates of return on a fund’s assets These rates of return should be based on the market value of the fund’s assets A Lesson from History (cont’d) Complete evaluation of the manager’s performance must include examining a measure of the degree of risk taken in the fund Circumstances under which fund managers must operate vary so great that indiscriminate comparisons among funds might reflect differences in these circumstances rather than in the