Modern Portfolio Theory and Investment Analysis, 9th Edition

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Evaluation of Portfolio Performance

An integral part of any decision-making process should be the evaluation of the decision. This is equally true whether investors make their own investment decisions or employ a manager to make them.

A large percentage of investments are made by professional managers. Professionally managed funds include mutual funds, pension funds, college endowments, and discretionary accounts, among others. It is important for an investor utilizing one of these managers not only to evaluate how well the fund has done relative to other funds but also to understand the fund's general policies and to be able to tell how well the fund has followed them. How diversified is the fund? How actively does it try to pursue short-run aberrations in prices? What is the bond–stock mix, and how much does it vary? For the individual investor to understand the risks he is undertaking, the fund's policies and how strictly the manager adheres to them must be known. For the institution that has engaged a professional manager, examining the manager's policies enables the institution to evaluate not only the risks it is undertaking but also the costs of any restrictions it might have placed on the fund manager.

Evaluation is important, not only to the individual or institution who engages a professional money manager but also to the individual who invests personal funds. Once again, evaluation involves more than rating how well the investor has performed compared to others. To ...