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Finance, Economics, and Mathematics by Robert C. Merton, Oldrich A. Vasicek

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Chapter 25Bond Performance: Analyzing Sources of Return

By Gifford Fong, Charles Pearson and Oldrich Vasicek

Journal of Portfolio Management, 9 (3) (1983), 46–50.

Measuring the performance of bond portfolios has been an evolutionary effort. Early work focused on measuring the total return of the portfolio (Bank Administration Institute 1968). This involved establishing alternative measures of performance suitable for comparing the total return of one portfolio with another. The performance of a given portfolio can then be contrasted with that of an index, other portfolios, and the investment objectives of the fund sponsor. While this allows an assessment of the total portfolio results relative to the market conditions, it provides an insufficient insight into the underlying causes of the experienced performance. Explaining how the actual portfolio return was achieved is also an important objective of performance analysis.

Understanding the sources of the return of a portfolio can help in monitoring the effectiveness of the management process and in identifying its strengths and weaknesses. The manager can more effectively evaluate the consequences of the decision-making process. A framework providing sources of return may also serve as a communication aid for clients or for marketing purposes. For the portfolio sponsor, this analysis promotes insight into where and how much contribution to return has been made from the various sources of return. This is useful again as an aid ...

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