Chap 18 - Évaluation et attribution de la performance d'un portefeuille Flashcards
What are the three ways that investors can estimate expected returns ?
- The average contemporaneous return to a peer group of comparably managed portfolios
- The contemporaneous return to an index (or index fund) serving as a benchmark for the managed portfolio
- Peer groups and benchmarks are easily observable and often represent viable alternative investment vehicles—thus making them a genuine opportunity cost—but they do not control explicitly for the risk incurred by the actual portfolio.
- The return estimated by a risk factor model, such as the CAPM or multifactor model: Factor models can estimate systematic risk exposures very precisely but are generally not investible alternatives; it is difficult to “buy” the return from a theoretical model.
What are two main questions that an investor attempts to answer when assessing the performance of an investment manager?
First, how did the portfolio manager actually perform? : The answer to this question represents the “bottom line” as to whether the manager they hired possesses genuine investment skill (satisfy expectations).
Second, why did the portfolio manager perform as he or she did? : The investor then investigate the source of the actual performance. That is, given all of the things a manager can do in an attempt to produce positive alpha (for example, superior security selection, market timing), which decisions were effective and which were ineffective?
What is a peer group comparison ?
A peer group comparison, which Kritzman (1990) describes as the most common manner of evaluating portfolio managers, collects the returns produced by a representative set of investors over a specific period of time and displays them in a simple boxplot format.
Specifically, maximum drawdown calculates the largest percentage decline in value—from peak to trough—wherever during the horizon that occurs (Measure the downside risk the investor has been exposed to when holding a particular portfolio). The underlying assumption is that for two managers following the same investment style, the one with the smaller drawdown percentage has been more successful in protecting the investor against adverse movements in the market.
Given the market portfolio performance, it is possible to draw the CML. If the Portfolios are above the line, it indicates superior risk-adjusted performance.
Treynor (1965) likewise conceived of a composite measure to evaluate the performance of mutual funds. He postulated two components of risk: (1) risk produced by general market fluctuations and (2) risk resulting from unique fluctuations in the portfolio securities. To identify risk due to market fluctuations, he introduced the characteristic line, which defines the relationship between the returns to a managed portfolio and the market portfolio.
TM = RM - RFR / βM
In this expression, βM equals 1.0 (the market’s beta), and TM indicates the slope of the
SML. Therefore, a portfolio with a higher T value than the market portfolio plots above the SML, indicating superior risk-adjusted performance.
A portfolio with a negative beta and an average rate of return above the risk-free rate of return would likewise have a negative T value. In this case, however, it indicates exemplary performance.
Like the T measure, the Jensen measure (Jensen, 1968) was originally based on the capital asset pricing model (CAPM), which calculates the expected one-period return on any security or portfolio by the following expression:
E(Rj) = RFR + βj *(E(RM) - RFR)
Then: Rjt - RFRt = αj + βj *(E(RM) - RFR) + ejt
Where random error term is ejt
The Jensen alpha measure of performance requires using a different RFR for each time interval during the sample period.
Also, like the Treynor measure, the Jensen measure does not directly consider the portfolio manager’s ability to diversify because it calculates risk premiums in terms of systematic risk. When evaluating the performance of a group of well-diversified portfolios such as mutual funds, this is likely to be a reasonable assumption.
What is the information ratio ?
The information ratio. This statistic measures a portfolio’s average return in excess of that for a benchmark portfolio divided by the standard deviation of this excess return.
What is the Sortino measure ?
The Sortino measure is a risk-adjusted performance statistic that differs from the Sharpe ratio in two ways. First, the Sortino ratio measures the portfolio’s average return in excess of a user-selected minimum acceptable return threshold, which is often the risk-free rate used in the S statistic although it need not be. Second, the Sharpe measure focuses on total risk—effectively penalizing the manager for returns that are both too low and too high—while the Sortino ratio captures just the downside risk (DR) in the portfolio.
For a completely diversified portfolio, T and S give identical performance rankings because total risk and systematic risk are the same. However, a poorly diversified portfolio could have a high ranking based on the Treynor ratio, which ignores unsystematic risk, but a much lower ranking with the Sharpe measure, which does not. Any difference in rankings produced by T and S comes directly from a difference in portfolio diversification levels. A disadvantage of the Treynor and Sharpe measures is that they only produce relative, not absolute, performance rankings.
