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Ebook Investment performance measurement: Part 2

(BQ) Part 2 book "Investment performance measurement" has contents: Absolute risk adjusted return, downside and relative risk adjusted return, security and segment returns, security and segment returns, imr and gips compliant performance presentations,.and other contents. | PART three Measuring Risk-Adjusted Performance CHAPTER 12 Absolute Risk-Adjusted Return he standard deviation and downside risk measures quantify the dispersion of returns earned over time, which is our primary proxy for absolute risk. The Beta and tracking error provide us with measures of the benchmark relative risk of a portfolio. Given a measure of risk, our next task is to address the question of whether the return was sufficient given the risks taken. One way to do this is to compare the combined risk and return earned by several peer group portfolios and our portfolio to a benchmark. We can make a visual comparison by creating a chart plotting the combination risk/return observations for each portfolio. Exhibit 12.1 plots the 3-year annualized return and 3-year annualized standard deviations for ten large company stock funds. T EXHIBIT 12.1 Risk versus Return 183 184 MEASURING RISK-ADJUSTED PERFORMANCE The Y-axis represents the standard deviation of returns over the period and the X-axis represents the measure of return, here the arithmetic average return, for the period. We can see that there is a general relationship between the risks taken and the returns earned. But there are some exceptions. For example, Fund B exhibited the highest standard deviation, but earned a lower return than funds F and J. Funds C and H had approximately the same risk, but Fund C had a higher return. So it is important to relate risk and return in order to evaluate the performance of a fund. In addition to the graphical representation, it would be worthwhile to have numerical measures of the combined risk and return exhibited by a portfolio. We can adjust the returns earned over time by the standard deviation of return and other statistical descriptions of risks taken in order to derive measures of risk-adjusted return. Risk-adjusted returns are composite risk-return measures that are used to help determine whether or not the returns earned were sufficient compared