Zeus Asset Management
Business and Economics
Technical Content
Go8
Business and Economics
Funds Management Performance
(BKM Ch 24)
Introduction
§ Investment Performance is a complicated subject § Theoretically correct measures are difficult to construct § Different statistics or measures are appropriate for different types of investment decisions or portfolios § Many industry and academic measures are different § The nature of active management leads to measurement problems
Introduction
§ Two common ways to measure average portfolio return:
1. Time-weighted returns 2. Dollar-weighted returns
§ Returns must be adjusted for risk.
AFF5300 Case Studies in Finance
4
Dollar- and Time-Weighted Returns
Time-weighted returns § The geometric average is a time-weighted average. § Each period’s return has equal weight.
(1 + rG ) = (1 + r1 )(1 + r2 )...(1 + rn )
AFF5300 Case Studies in Finance 5
n
Dollar- and Time-Weighted Returns
Dollar-weighted returns
§ Internal rate of return considering the cash flow from or to investment § Returns are weighted by the amount invested in each period:
Cn C1 C2 PV = + + ... 1 2 (1 + r ) (1 + r ) (1 + r )n
AFF5300 Case Studies in Finance
6
Example of Multiperiod Returns
AFF5300 Case Studies in Finance
7
Dollar-Weighted Return
$2 $4+$108
-
$50
-
$53
Dollar-weighted Return (IRR):
− 51 112 − 50 = + 1 (1 + r ) (1 + r ) 2 r = 7.117%
AFF5300 Case Studies in Finance 8
Time-Weighted Return
53 − 50 + 2 r1 = = 10% 50 54 − 53 + 2 r2 = = 5.66% 53 rG = [ (1.1) (1.0566) ]1/2 – 1 = 7.81% The dollar-weighted average is less than the time-weighted average in this example because more money is invested in year two, when the return was lower.
AFF5300 Case Studies in Finance 9
Adjusting Returns for Risk
§ The simplest and most popular way to adjust returns for risk is to compare the portfolio’s return with the returns on a comparison universe. § The
Technical Content
Go8
Business and Economics
Funds Management Performance
(BKM Ch 24)
Introduction
§ Investment Performance is a complicated subject § Theoretically correct measures are difficult to construct § Different statistics or measures are appropriate for different types of investment decisions or portfolios § Many industry and academic measures are different § The nature of active management leads to measurement problems
Introduction
§ Two common ways to measure average portfolio return:
1. Time-weighted returns 2. Dollar-weighted returns
§ Returns must be adjusted for risk.
AFF5300 Case Studies in Finance
4
Dollar- and Time-Weighted Returns
Time-weighted returns § The geometric average is a time-weighted average. § Each period’s return has equal weight.
(1 + rG ) = (1 + r1 )(1 + r2 )...(1 + rn )
AFF5300 Case Studies in Finance 5
n
Dollar- and Time-Weighted Returns
Dollar-weighted returns
§ Internal rate of return considering the cash flow from or to investment § Returns are weighted by the amount invested in each period:
Cn C1 C2 PV = + + ... 1 2 (1 + r ) (1 + r ) (1 + r )n
AFF5300 Case Studies in Finance
6
Example of Multiperiod Returns
AFF5300 Case Studies in Finance
7
Dollar-Weighted Return
$2 $4+$108
-
$50
-
$53
Dollar-weighted Return (IRR):
− 51 112 − 50 = + 1 (1 + r ) (1 + r ) 2 r = 7.117%
AFF5300 Case Studies in Finance 8
Time-Weighted Return
53 − 50 + 2 r1 = = 10% 50 54 − 53 + 2 r2 = = 5.66% 53 rG = [ (1.1) (1.0566) ]1/2 – 1 = 7.81% The dollar-weighted average is less than the time-weighted average in this example because more money is invested in year two, when the return was lower.
AFF5300 Case Studies in Finance 9
Adjusting Returns for Risk
§ The simplest and most popular way to adjust returns for risk is to compare the portfolio’s return with the returns on a comparison universe. § The