1. BUILDING SHARPE OPTIMIZATION STOCK PORTFOLIOS AND PERFORMANCE ANALYSIS

2. SCOPE OF PRESENTATION INTRODUCTION
SHARPE RATIO & OTHER PERFORMANCE MEASURES
COMPARING PERFORMANCE MEASURES
METHODOLOGY ADOPTED
CONCLUSION
RECOMMENDATIONS

3. NEED FOR PERFORMANCE ANALYSIS
MUTUAL FUNDS THE MOST APPROPRIATE OPPORTUNITY FOR SMALL INVESTORS
AS FINANCIAL MARKETS BECOME MORE COMPLEX & SOPHISTICATED , INVESTORS NEED A FINANCIAL INTERMEDIARY
MODELS LIKE SHARPE PROVIDE PROFESSIONAL EXPERTISE ON SUCCESFUL INVESTING

4. SHARPE RATIO
The Sharpe ratio is a reward-to-risk ratio that focuses on total risk.
It is computed as a portfolio’s risk premium divided by the standard deviation for the portfolio’s return.

5. SHARPE RATIO FOR A LAYMAN
IT QUANTIFIES THE RISK EFFICIENCY OF AN INVESTMENT
EQUAL TO EFFECTIVE RETURN(ACTUAL RETURN MINUS RISK FREE RATE) OF AN INVESTMENT DIVIDED BY STANDARD DEVIATION
A HIGH SHARPE RATIO SIGNALS AN INVESTMENT WITH GREATER RISK EFFICIENCY AND IS DESIRABLE

6. OTHER PERFORMANCE MEASURES
The Treynor Ratio
The Treynor ratio is a reward-to-risk ratio that looks at systematic risk only.
It is computed as a portfolio’s risk premium divided by the portfolio’s beta coefficient.

7. OTHER PERFORMANCE MEASURES
Jensen’s Alpha
Jensen’s alpha is the excess return above or below the security market line. It can be interpreted as a measure of how much the portfolio “beat the market.”
It is computed as the raw portfolio return less the expected portfolio return as predicted by the CAPM.
“Extra” Return
Actual return
CAPM Risk-Adjusted ‘Predicted’ Return

8. Comparing Performance Measures, I.
Because the performance rankings can be substantially different, which performance measure should we use?
Sharpe ratio:
Appropriate for the evaluation of an entire portfolio.
Penalizes a portfolio for being undiversified, because in general, total risk  systematic risk only for relatively well-diversified portfolios.

9. Comparing Performance Measures, II.
Treynor ratio and Jensen’s alpha:
Appropriate for the evaluation of securities or portfolios for possible inclusion into an existing portfolio.
Both are similar, the only difference is that the Treynor ratio standardizes returns, including excess returns, relative to beta.
Both require a beta estimate (and betas from different sources can differ a lot).

10. Sharpe-Optimal Portfolios, I.
Allocating funds to achieve the highest possible Sharpe ratio is said to be Sharpe-optimal.
To find the Sharpe-optimal portfolio, first look at the plot of the possible risk-return possibilities, i.e., the investment opportunity set.
Expected
Return
Standard deviation ×

11. Sharpe-Optimal Portfolios, II.
The slope of a straight line drawn from the risk-free rate to where the portfolio plots gives the Sharpe ratio for that portfolio.
Expected
Return
Standard deviation × A Rf
The portfolio with the steepest slope is the Sharpe-optimal portfolio.

12. Sharpe-Optimal Portfolios, III.

13. METHODOLOGY ADOPTED
CALCULATION OF ALL THE COMPOSITE PERFORMANCE MEASUREMENT RATIOS
RANKING THE SELECTED 24 MUTUAL FUNDS AS PER THE RATIOS OBTAINED
APPLICATION OF SHARPE OPTIMIZATION TECHNIQUE TO KOTAK 30 EQUITY GROWTH MUTUAL FUND

14. RANKING OF SAMPLE MUTUAL FUNDS ON BASIS OF TREYNOR RATIO

15. RANKING OF SAMPLE MUTUAL FUNDS ON BASIS OF TREYNOR RATIO

16. RANKING OF SAMPLE MUTUAL FUNDS ON BASIS OF JENSON RATIO

17. RANKING OF SAMPLE MUTUAL FUNDS ON BASIS OF SHARPE RATIO

18. ORIGINAL ASSET ALLOCATION FOR KOTAK 30 GROWTH SCHEME

19. RESULTS OF SHARPE OPTIMISATION FOR KOTAK 30 GROWTH SCHEME

20. CONCLUSION
SHARPE RATIO IS A BLUNT INSTRUMENT TO MEASURE RISK ADJUSTED RETURN
IT PRESENTS A MORE COMPLETE PICTURE OF FUND PEFORMANCE THAN RAW RETURN
IT HELPS INVESTORS EVALUATE RELATIVE SUCCESS OF COMPETING FUNDS FOLLOWING THE SAME BROAD INVESTMENT STRATEGIES

21. RECOMMENDATIONS WELL KNOWN PORTFOLIOS CAN HAVE IMPROPER DESIGNS TOO
A GOOD FUND MANAGER SHOULD NOT RELY ON A SINGLE MEASURE FOR DESIGNING A PORTFOLIO
FINALLY ,EVALUATION OF A FUND MANAGER SHOULD BE DONE MANY TIMES OVER DIFFERENT MARKET ENVIRONMENT

22. “It is not the return on my investment that I am concerned about.
It is the return of my investment!”
– Will Rogers