Material for Group D
Evaluation of Portfolio Performance
(Source: Book on Port Folio Management by Professors. S.K.Barua, V.Raghunathan and J.R.Varma)
In this book, we have, so far, discussed how to design and revise our portfolios. What
remains now is the bottom line – how well has the portfolio done? This chapter deals
with the evaluation of portfolio performance.
There are a number of situations in which such an evaluation becomes necessary and
important:
- Self Evaluation As individuals, we might want to evaluate how well we
have done. This is a part of the process of refining our skills and
improving our performance over a period of time. - Evaluation of Managers A mutual fund or similar organization might
want to evaluate its managers. A mutual fund may have several
managers each running a separate fund or sub-fund. It is often
necessary to compare the performance of these managers. - Evaluation of Mutual Funds As investors, we may want to evaluate the
various mutual funds operating in the country to decide which, if any,
of these should be chosen for investment. Similar need arises for
individuals or organizations who engage external agencies for portfolio
advisory services. - Evaluation of Groups As academics or researchers, we may want to
evaluate the performance of a whole group of investors and compare it
with another group of investors who use different techniques or who
have different skills or access to different information.
While these situations differ in the objective of evaluation and in the extent of
information available, the general method of evaluation is the same for all of them. The
discussion in this chapter would be of use in all these situations. We shall use the term
portfolio manager to refer to the person responsible for taking decisions regarding the
portfolio. In the case of self evaluation discussed above, the investor should for the
purpose of this chapter be regarded as his own portfolio manager.
Need for the Portfolio View
One can think of evaluating performance at three different levels of aggregation:
- We can try to evaluate every transaction. Whenever a security is bought or
sold, we can attempt to assess whether the decision was correct and profitable. - We can try to evaluate the performance of a specific security in the portfolio
to determine whether it has been worthwhile to include it in our portfolio.