Foundations and Trends® in Finance > Vol 2 > Issue 2

Portfolio Performance Evaluation

George O. Aragon, W.P. Carey School of Business, Arizona State University, George.Aragon@asu.edu Wayne E. Ferson, Marshall School of Business, University of Southern California, ferson@marshall.usc.edu
 
Suggested Citation
George O. Aragon and Wayne E. Ferson (2007), "Portfolio Performance Evaluation", Foundations and TrendsĀ® in Finance: Vol. 2: No. 2, pp 83-190. http://dx.doi.org/10.1561/0500000015

Published: 06 Nov 2007
© 2008 G. O. Argon and W. E. Ferson
 
Subjects
Financial markets
 
Keywords
Portfolio performanceMutual fund performanceHedge fundsManaged portfolios
 

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In this article:
1 Introduction
2 Classical Measures of Portfolio Performance
3 Conditional Performance Evaluation
4 The Stochastic Discount Factor Approach
5 Implementing the Measures: A Fund-of-Funds Perspective
6 Bond Fund Performance Measurement
7 Hedge Fund Performance
8 Recent Empirical Evidence
9 A Summary: The Evidence on Managed Portfolio Performance and Market Efficiency
10 Conclusions
Acknowledgments
References

Abstract

This paper provides a review of the methods for measuring portfolio performance and the evidence on the performance of professionally managed investment portfolios. Traditional performance measures, strongly influenced by the Capital Asset Pricing Model of Sharpe (1964), were developed prior to 1990. We discuss some of the properties and important problems associated with these measures. We then review the more recent Conditional Performance Evaluation techniques, designed to allow for expected returns and risks that may vary over time, and thus addressing one major shortcoming of the traditional measures. We also discuss weight-based performance measures and the stochastic discount factor approach. We review the evidence that these newer measures have produced on selectivity and market timing ability for professional managed investment funds. The evidence includes equity style mutual funds, pension funds, asset allocation style funds, fixed income funds and hedge funds.

DOI:10.1561/0500000015
ISBN: 978-1-60198-082-3
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ISBN: 978-1-60198-083-0
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Table of contents:
Introduction
Classical Measures of Portfolio Performance
Conditional Performance Evaluation
The Stochastic Discount Factor (SDF) Approach
Implementing the Measures: A fund-of-funds Perspective
Bond Fund Performance Measurement
Hedge Fund Performance
Recent Evidence on Managed Portfolio Performance
A Summary: The Evidence on Managed Portfolio Performance and Market Efficiency
Conclusions
References

Portfolio Performance Evaluation

Portfolio Performance Evaluation reviews the academic literature on evaluating portfolio performance, focusing on professionally managed investment portfolios. Recent years have witnessed an explosion of new methods for performance evaluation and new evidence on the subject. Portfolio Performance Evaluation provides a selective review of the methods for measuring portfolio performance and the evidence on the performance of professionally managed investment portfolios. There is also a discussion of hedge funds presenting unique challenges for measuring risk adjusted performance and for interpreting performance measures. Portfolio Performance Evaluation summarizes the historical evidence on the performance of mutual funds and hedge funds using actual data.

 
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