A PRESENTATION ON:

FACTORS AFFECTING PERFORMANCE MEASURE

RELIABILITY OF PERFORMANCE MEASURES

EFFICIENT MARKET HYPOTHESIS

PART ONE

MEANING:

A Portfolio refers to Collection of financial assets such as stocks, bonds, and cash.

Portfolio performance evaluation / measurement can be referred to as an assessment of our portfolio wherein we compare the returns that we have actually earned on our portfolio as against the returns that we had targeted for.

It involves two important functions: To measure the return earned on a portfolio during the holding period or investment period. To conclude whether the performance was superior or inferior.
The

evaluation of portfolio is always followed by Revision and Reconstruction.

Methods to evaluate Portfolio performance:

Investors are interested to know how much they have gained and also whether they are heading towards their objective using right direction or not.

For this, it is important for them to measure their portfolio periodically. This helps them to identify risks if any, associated with their investment.
There

are certain methods through which investors can assess their portfolio at regular intervals. In other words, The evaluation of a portfolio performance can be made based on one of the following methods: Sharpes Measure Treynors Measure Jensens Measure

SHARPE RATIO:

Derived in 1966 by William Sharpe.

Objective of modern portfolio theory is maximization of return or minimization of risk.

We will get a measure of portfolios total risk and variability of return in relation to the risk premium. The measure of a portfolio can be done by the following formula: SI = (Rt Rf)/f Where, SI = Sharpes Index Rt = Average return on portfolio Rf = Risk free return f = Standard deviation of the portfolio return.

TREYNORS RATIO

Derived by Jack L. Treynor.

Treynors

Measure: The Treynors measure is related to a portfolios excess return to non-diversifiable or systematic risk. The total risk of the portfolio is replaced by beta. The equation can be presented as follow: Tn = (Rn Rf)/m Where, Tn = Treynors measure of performance Rn = Return on the portfolio Rf = Risk free rate of return m = Beta of the portfolio (A measure of systematic risk)

JENSENS MEASURE

Jensen attempts to construct a measure of absolute performance on a risk adjusted basis.

For

example, if there are two mutual funds that both have a 12% return, a rational investor will want the fund that is less risky.
A positive value

for Jensen's alpha means a fund manager has "beat the market" with his or her stock picking skills.
The

Jensen measure of the performance of portfolio can be calculated by applying the following formula: Rp = Rf + (RMI Rf) x Where, Rp = Return on portfolio RMI = Return on market index Rf = Risk free rate of return

FACTORS AFFECTING PORTFOLIO MEASURES

Following factors affect portfolio measures

Return

Diversification

Risk

Liquidity

Marketability

FACTORS AFFECTING PERFORMANCE MEASURES:

The evaluation of a portfolio performance during the scheduled time horizon is very important for investor and portfolio manager. Following are the Factors: Return- Higher the return, better the performance.

Risk- Performance depend upon how much risk is undertaken by portfolio managers and their efficiency and ability in timing the market.

Marketability- Proper asset allocation and marketable investment.

Liquidity- Reviewing and revising the portfolio time to time to keep investment liquid.
Diversification- Provides diversification benefits and

good returns.

Reliability of Performance Measures...

Every

portfolio bears certain risk which is measured by the deviation of actual return of the portfolio from the expected return.:
The

portfolio risk also depend upon correlation or covariance of the securities among themselves.
The

investor always tend to create a portfolio which offer maximum return from a varying level of risk or a portfolio which offer minimum risk for varying level of expected return.
The

ability to diversify with a view to reduce and eliminate all unsystematic risk and expertise in managing the systematic risk related to the market by use appropriate risk measures such as betas and selection of proper securities

Diversification in

term of Sharpe s single Index Model can reduce the market related risk and maximize the return for a given level of risk
Sharpe ratio

doesnt always provide an accurate analysis of return on risk or volatility.

Sharpes Index measures

total risk by standard deviation .Reward is the numerator as risk premium. total risk is in the denominator as standard deviation of its return.
The

Sharpe ratio is unusual in that it can be applied to both ex-ante (expected) returns and ex-post (historical) returns.

the Sharpe ratio, the Treynor ratio doesnt quantify the value addedit is simply a ranking mechanism. Where the two mechanisms differ is that the Sharpe ratio considers total risk (the standard deviation of the portfolio) while the Treynor ratio considers systematic risk (the beta of a portfolio versus the benchmark).
Like If

diversification is perfect and unsystematic, risks is nil or negligible then the only element of risk in both the portfolio measurements is the systematic variance.
In

practice, its possible to simply look up Treynor ratios for many listed equity funds. For example, many newspapers and financial websites will list Treynor figures under performance data, usually over three, five, and 10 years.

Jensen measure of the performance of portfolio is different from that of Sharpe and Treynor. It gives a measure of a absolute performance on a risk adjusted basis.

This standard, based on capital asset pricing managers predictive ability to achieve higher return than expected for the given risk.

Part three: Efficient Market Hypothesis :

An

efficient capital market is a market that is efficient in processing information.

In

other words, the market quickly and correctly adjusts to new information.

In

an informationally efficient market, the prices of securities observed at any time are based on correct evaluation of all information available at that time. E.M.H is divided in 3 forms: Weak, Semi strong and Strong.
1)

Weak:

It says that past prices, volume, and other market statistics provide no information that can be used to predict future prices. Prices should change very quickly and to the correct level when new information arrives.

2) The Semi-strong Form:

The semi-strong form says that prices fully reflect all publicly available information and expectations about the future.
The semi-strong form, if correct, repudiates fundamental analysis. Most studies find that the markets are reasonably efficient in this sense, but the evidence is somewhat mixed. 3)The Strong Form: The strong form says that prices fully reflect all information, whether publicly available or not. Most studies have found that the markets are not efficient in this sense.

Interpreting the EMH in tabular form:

Conclusion
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.

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By: SHEFALI DARJI DIVYA RAVAL TANVI PATEL MANALI NARGOLKAR SUVIDHA REDKAR