1. Dr. Lokanandha Reddy Irala(www.irala.org) 1 Portfolio Performance Evaluation RETURN BASED METHODS

2. Dr. Lokanandha Reddy Irala(www.irala.org) 2 Measures of return  Time-Weighted Rate of Return(TWROR)  Money-Weighted Rate of Return(MWROR)  Linked Internal Rate of Return(LIROR)

3. Dr. Lokanandha Reddy Irala(www.irala.org) 3 Time-Weighted Rate of Return(MWROR)  Compute the return on the portfolio for each sub period  Average the individual sub period returns

4. Dr. Lokanandha Reddy Irala(www.irala.org) 4 Money-Weighted Rate of Return(MWROR)  IRR over the period  Factors affecting MWROR The beginning and ending market values Size and timing of intermediate cash flows

5. Dr. Lokanandha Reddy Irala(www.irala.org) 5 1. Return based Methods  1.1 Change in NAV Method  1.2 Total Returns Method Doesn’t Consider TVM

6. Dr. Lokanandha Reddy Irala(www.irala.org) 6 1. Return based Methods  1.3. Rupee weighed Returns Example I: A case of dividends Suppose the beginning NAV is Rs. 100. You have received Rs. 5 as the dividend at the end of 6 months and at the end of the year the NAV is Rs. 110 EoY00.51 CF-1005110

7. Dr. Lokanandha Reddy Irala(www.irala.org) 7 1. Return based Methods  1.3. Rupee weighed Returns Example II: A case of fresh Investment Suppose the beginning NAV is Rs. 100. You have invested another Rs. 10 at the end of 6 months and at the end of the year the NAV is Rs. 120. EoY00.51 CF-100- 10120

8. Dr. Lokanandha Reddy Irala(www.irala.org) 8 Risk adjusted Methods  Differential Return : Jensen’s Alpha  Return per unit Risk Sharpe’s RVAR Treynor’s RVOL

9. Dr. Lokanandha Reddy Irala(www.irala.org) 9 Sharpe’s measure  Sharpe’s measure Excess Return per Unit Total RISK  Larger the ratio, better is the performance of the fund

10. Dr. Lokanandha Reddy Irala(www.irala.org) 10 Treynor’s measure  Treynor’s measure Excess Return per Unit SYS. RISK  Larger the ratio, better is the performance of the fund

11. Dr. Lokanandha Reddy Irala(www.irala.org) 11 Jensen’s Alpha  Given a good estimate of the risk free rate, use the SML to arrive at the expected return on the portfolio is the actual return on the portfolio The fund is said to have performed better if Jensen’s Alpha is + Ve else other wise.

12. Dr. Lokanandha Reddy Irala(www.irala.org) 12 Appraisal ratio  Divide the Alpha of the portfolio by the non systematic risk of the portfolio

13. Dr. Lokanandha Reddy Irala(www.irala.org) 13 M 2 Measure  Compare the return on Managed portfolio with that of the market after adjusting the managed portfolio to carry the same SD as market  Consider the following Portfolio PMarket M Avg. Return35%28% Beta1.201.00 Standard Deviation42%30% Non systematic Risk σ(e)18%0

14. Dr. Lokanandha Reddy Irala(www.irala.org) 14 M 2 Measure  Adjusted Managed Portfolio Is created by mixing the managed Portfolio with a risk free asset  Thus the Variance of Adjusted Portfolio shall be

15. Dr. Lokanandha Reddy Irala(www.irala.org) 15 M 2 Measure  Setting the SD of Adjusted Managed Portfolio equal to Market

16. Dr. Lokanandha Reddy Irala(www.irala.org) 16 M 2 Measure  Adjusted Managed portfolio  Invest.714(30/42) in P and rest in r f  Return on Adjusted Portfolio (.714x35%) +(.286x6%)=26.7%  M 2 = adj r p -r M  M 2 =26.7%-28%=-1.3%

17. Dr. Lokanandha Reddy Irala(www.irala.org) 17 Performance Attribution  Asset Allocation  Stock Selection

18. Dr. Lokanandha Reddy Irala(www.irala.org) 18 Performance Attribution rearranging Total Contribution Asset Allocation Stock Selection

19. Dr. Lokanandha Reddy Irala(www.irala.org) 19 Morning Star Ratings  A ranking ranging from one to five stars, with one being the poorest rank and five being the best  given to publicly traded mutual funds and ETFs by the investment research firm Morningstar.  Morningstar's risk ratings, also called star ratings, are designed to help investors quickly identify funds to consider purchasing for their portfolios.  These ratings are intended to be a starting point for further research and are not buy or sell recommendations.

20. Dr. Lokanandha Reddy Irala(www.irala.org) 20 Morning Star Ratings  Morningstar risk ratings have been around since 1985 and are based on the fund's past performance, the fund manager's skill, risk- and cost-adjusted returns, and performance consistency.  Morningstar assigns a one-star rating to 10% of the funds it evaluates, a two-star rating to 22.5% of funds, a three-star rating to 35% of funds, a four-star rating to 22.5% of funds and a five-star rating to 10% of funds.  Morningstar also provides category ratings and peer-group ratings to help investors further compare funds.