Chapter 18 Performance Evaluation Risk Adjusted Performance to measure abnormal performance we must measure normal performance the single index model can be used o RP BPRM P eP o E RP BPE RM P P portfolio alpha RP average excess return on the portfolio BP portfolio beta RM average excess return on the market Jensen s Alpha Measure o P RP BPRM o measure of abnormal return o greater abnormal return may be due to greater risk o rank portfolio performance by the adjusted alpha P BP Sharpe ratios o Sue hen choosing among competing portfolios that will not be mixed o Sharpe Rp Rf P Rp average return of portfolio Rf risk free rate P portfolio standard deviation o Use to evaluate a portfolio when portfolio is a piece of a larger portfolio that has different Treynor Ratios managers o Rp Rf B P 3 Factor Evaluation Model RP Rf BMkt RM Rf BSMBRSMB BHMLRHML P o dictates residual risk of portfolio unsystematic alpha o use formula to solve for as a percentage Market Timing Adjust the asset allocation for movements in the market o Shifts between stocks money markets bonds o With perfect ability to forecast behaves like an option Timer adjusts portfolio for up and down movements in the market o Low market return low beta o High market return high beta
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