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PORTFOLIO MANAGEMENT

VIEWS: 5 PAGES: 16

  • pg 1
									                      PORTFOLIO EVALUATION




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                                             MUTUAL FUNDS
             Mutual fund is an investment vehicle that
              pools together, funds from investors to
              purchase stocks, bonds or other
              securities. An investor can participate in
              the mutual fund by buying the units of the
              fund. Each unit is backed by a diversified
              pool of assets, where the funds have been
              invested.



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                      Advantages of Mutual Funds

             •     Professional Management
             •     Diversification
             •     Return Potential
             •     Low Costs
             •     Liquidity
             •     Transparency
             •     Flexibility
             •     Choice of Scheme
             •     Well regulated



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                  Evaluation of Managed Portfolios

                         • Sharpe‘s Performance Index
                         • Treynor’s Performance Index
                         • Jensen Performance Index




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                       Sharpe‘s Performance Index
             Sharpe's performance index gives a single value
               to be used for the performance ranking of
               various funds or portfolios. Sharpe index
               measures the risk premium of the portfolio
               relative to the total amount of risk in the portfolio.
               This risk premium is the difference between the
               portfolio's average rate of return and the risk free
               rate of return. The standard deviation of the
               portfolio indicates the risk. The index assigns the
               highest values to assets that have best risk-
               adjusted average rate of return



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   




                       Sharpe‘s Performance Index


                                                            St =Rp-Rf
                                                                 σp




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   




                       Sharpe‘s Performance Index


                        Fund               Average Risk free rate of   Standard
                                         Annual return interest        deviation
                           A                0.0879       0.05           0.0829
                           B                0.1347       0.05           0.1982



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   




                       Sharpe‘s Performance Index

                                               R

                                                            Fund A
                                                                     Fund B




                                              0             p




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                      Treynor’s Performance Index

             The fund's performance is measured in
              relation to the market performance. The
              ideal fund's return rises at a faster rate
              than the general market performance
              when the market is moving, upwards and
              its rate of return declines slowly than the
              market return, in the decline. The ideal
              fund may place its fund in the treasury bills
              or short sell the stock during the decline
              and earn positive return.


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                      Treynor’s Performance Index



                                                            Tn = Rp - Rf
                                                                  βp




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                      Treynor’s Performance Index



                                        Fund                         Average return            Beta
                                A                           0.0879                    0.499
                                B                           0.1347                    1.2943

                               Risk free rate of return is 5%



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                      Treynor’s Performance Index




                   Fund “A” is more desirable than “B” because it
                  earned more risk premium per unit of systematic
                  risk i.e. Tn of A 0.076 > 0.0678 of 'B's.

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                         Jensen Performance Index
             The absolute risk adjusted return measure-was
               developed by Michael Jensen and commonly
               known as Jensen's measure. It is mentioned as
               a measure of absolute performance-because a
               definite standard is set and-against that the
               performance is measured. The standard is
               based on the manager's predictive ability.
               Successful prediction of security price would
               enable the manager to earn higher returns than
               the ordinary investor expects to earn in a given
               level of risk.



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                         Jensen Performance Index

                                                  Rp =α + β (Rm - Rf )
                                                 Rp = αp + Rf + β (Rm - Rf)




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                         Jensen Performance Index

                                             Portfolio      Rp    β    Rf
                                       A                    15   1.2   5%
                                       B                    12   0.8   5%
                                       C                    15   1.5   5%
                                       Market index         12   1.0   5%




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                                                            RECAP
             •         Mutual funds pool together the funds from investors
                       by selling units and invest them in different types of
                       securities.
             •         Closed-end funds are open for a specific period for
                       subscription. The open-ended funds units are
                       available continuously.
             •         Portfolio evaluation is carried out to assess the risk
                       and return of the different portfolios.
             •         Sharpe index is a measure of risk premium related
                       to the total risk.
             •         Treynor index measures the fund’s performance in
                       relation to the market performance.
             •         Jensen index compares the actual or realised return
                       of the portfolio with the calculated or predicted
                       return. Better performance of the fund depends on
                       the predictive ability of the managerial personnel of
                       the fund.

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