Portfolio Performance Measurement and Benchmarking

Book description

In order to make sound investment choices, investors must know the projected return on investment in relation to the risk of not being paid. Benchmarks are excellent evaluators, but the failure to choose the right investing performance benchmark often leads to bad decisions or inaction, which inevitably results in lost profits.

The first book of its kind, Portfolio Performance Measurement and Benchmarking is a complete guide to benchmarks and performace evaluation using benchmarks. In one inclusive volume, readers get foundational coverage on benchmark construction, as well as expert insight into specific benchmarks for asset classes and investment styles.

Starting with the basics—such as return calculations and methods of dealing with cash flows—this thorough book covers a wide variety of performance measurement methodologies and evaluation techniques before moving into more technical material that deconstructs both the creation of indexes and the components of a desirable benchmark.

Portfolio Performance Measurement and Benchmarking provides detailed coverage of benchmarks for:

  • U.S. equities
  • Global and international equities
  • Fixed income
  • Real estate

The team of renowned authors offers illuminating opinions on the philosophy and development of equity indexes, while highlighting numerous mechanical problems inherent in building benchmarks and the implications of each one.

Before you make your next investment, be certain your return will be worth the risk with Portfolio Performance Measurement and Benchmarking.

Table of contents

  1. Cover Page
  2. Portfolio Performance Measurement and Benchmarking
  3. Copyright Page
  5. Preface
  6. Chapter 1 What Is Performance and Benchmarking?
    1. The Basic Issue: Has Your Wealth Increased?
    2. Was the Change in Wealth Worth the Risk?
    3. Comparing Return with Alternative Investment Returns
    4. Active Investing versus Passive Investing
    5. Performance Attribution
  7. Chapter 2 Asset Class Return Expectations
    1. The Expected Range of Returns from Different Kinds of Investments
    2. What Range of Values Is Likely to Be Encountered?
  8. Chapter 3 Returns Without Cash Flows
    1. Portfolio Market Value
    2. Holding Period Return
    3. Linking Returns
    4. Rule of 72
  9. Chapter 4 Average Returns
    1. Average Return Per Period
    2. Annualized Return
    3. Compounding Frequency
    4. Expected Return
  10. Chapter 5 Returns in the Presence of Cash Flows
    1. Cash Flows
    2. Unit Value Method
    3. Time-Weighted Return
    4. Linked Internal Rate of Return
    5. The Dietz Method
    6. Subportfolio Returns and Consistency
    7. Time-Weighted versus Money-Weighted Returns
  11. Chapter 6 Comparing Two Portfolio Returns
    1. Excess Returns Over a Benchmark—Past Performance
    2. Compound Excess Return
    3. Situations Where the Arithmetic Excess Return Is the Appropriate Choice
    4. Recommended Practice
  12. Chapter 7 Some Foundations
    1. The Risk-Free Rate
    2. Market Equilibrium
    3. The CAPM of Sharpe, Lintner, and Mossin
    4. Arbitrage Pricing Theory (APT) and Other Asset Pricing Models
  13. Chapter 8 Estimating the Elements of the CAPM
    1. The CAPM with Constant Alpha and Beta Over Time
    2. Problems with the Use of Inappropriate Benchmarks
    3. Other Estimation Problems
  14. Chapter 9 What Is Risk?
    1. Types of Risk
    2. A Basic Measure of Risk as Volatility in Returns
    3. Measuring Bad Variation
    4. Covariance
    5. Tracking Error and Residual Risk
  15. Chapter 10 Risk-Adjusted Return Measures
    1. Sharpe Ratio
    2. Sortino Ratio
    3. Modigliani-Modigliani Measure
    4. Jensen’s Alpha
    5. Treynor’s Measure
    6. Appraisal Ratio and Information Ratio
    7. Comparing the Risk-Adjusted Measures
  16. Chapter 11 Fixed-Income Risk
    1. Duration: Macaulay, Modified, and Effective Duration
    2. Convexity
    3. Prepayment Risk for Mortgages and Callables
    4. Issuer-specific Risk, Default Risk, and Correlated Default Risk
  17. Chapter 12 Conditional Performance Evaluation
    1. Models for Performance Measurement
    2. Logic of Conditional Performance Evaluation
    3. Unconditional Alphas and Betas
    4. Time-Varying Conditional Betas
    5. Time-Varying Conditional Alphas
    6. Benchmark Portfolios
    7. Implications for Investors
  18. Chapter 13 Market Timing
    1. Merton-Henriksson Market Timing Model
    2. Treynor-Mazuy Model
    3. Up/Down Market Model: Up Market versus Down Market Beta
    4. The Problem of Non-Timing-Related Nonlinearities
  19. Chapter 14 Factor Models
    1. The Single Index Model
    2. Multiple Factor Models
    3. Factor Model Analytics
    4. A Simple Example
  20. Chapter 15 Factors of Equity Returns in the United States
    1. Various Factor Model Factors
    2. The Barra Factors
    3. Factor-Mimicking Portfolios: High-Low Approach and Factor Extraction Approach
  21. Chapter 16 Factor Model (Barra) Performance Attribution
    1. Attribution “Executive Summary”
    2. Total Annualized Attribution Chart
    3. Annual Attribution Report
    4. Annualized Contributions to Risk Indexes
    5. Industries: Top-10 and Bottom-10 Contributors to Active Return
    6. Asset Selection: Annualized Attribution
  22. Chapter 17 Contributions to Return
  23. Chapter 18 Performance Attribution
    1. Sector-Based Attribution Framework
    2. Single-Period Arithmetic Sector-Based Attribution
  24. Chapter 19 Linking Attribution Effects
    1. Multiperiod Contributions to Return
    2. Excess Return Recursion
    3. An Idealized Attribution System
    4. Logarithmic Linking Coefficients
    5. A Link to Recursive Methods
    6. Other Methods
    7. Example
    8. Other Topics
    9. Notes
    10. References
  25. Chapter 20 Benchmarks and Knowledge
    1. Peer Universes
    2. Passive Market Indexes
    3. Manager-Specific Stock-Matching Benchmark: Normal Portfolios
    4. For What Should a Manager Be Given Credit?
  26. Chapter 21 Elements of a Desirable Benchmark
    1. Origins of U.S. Equity Benchmarks
    2. The Fundamental Meaning and Purposes of a Financial Index
    3. Where You Stand on the “Best” Indexes Depends on Where You Sit
    4. The Best Index Is Based on Four Principles of Useful Indexes
    5. Desirability Trade-Offs
    6. Issues with Index Construction
    7. The Paradox of Asset Management
  27. Chapter 22 Index Weighting
    1. Advantages and Disadvantages of Capitalization Weighting
    2. Portfolio Equity Characteristics: Capitalization Weighting versus Equal Weighting
    3. Challenges to Capitalization Weighting
  28. Chapter 23 Practical Issues with Building Indexes
    1. Index Calculations
    2. Decisions That Have to Be Made by the Index Creator
    3. Russell U.S. Equity Index Construction
  29. Chapter 24 Styles, Factors, and Equity Benchmarks
    1. Defining Equity Style
    2. Types of Equity Styles
    3. Evidence of Styles
    4. Historical Perspective on Styles
    5. CAPM, Factor Models, and the Behavior of Styles
    6. Which Equity Style Is Best?
  30. Chapter 25 Equity Style Indexes: Tools for Better Performance Evaluation and Plan Management
    1. Introduction
    2. Style Definitions
    3. Performance Evaluation and Styles
    4. Style Index Construction
    5. Validation of Style Indexes
    6. Uses of the Style Indexes
    7. Conclusion
  31. Chapter 26 Russell Style Index Methodology
    1. Style Index Algorithm
    2. Rationale for Key Features
  32. Chapter 27 U.S. Equity Benchmarks
    1. S&P and S&P/Citigroup Family of Indexes
    2. Dow Jones Indexes
    3. Russell Indexes
    4. MSCI Family of Indexes
    5. CRSP Composite and Decile Indexes
    6. Other Indexes: NYSE and NASDAq Indexes
    7. Comparing Index Construction Issues
    8. Index Comparisons
    9. Conclusion
  33. Chapter 28 Global and International Equity Benchmarks
    1. Global versus International
    2. MSCI Index Family
    3. Dow Jones Global Indexes
    4. S&P/Citigroup Global Indexes
    5. FTSE Index Family
    6. Russell/Nomura Indexes
    7. Russell Global Indexes
    8. Conclusion
  34. Chapter 29 Fixed-Income Benchmarks
    1. Fixed-Income Benchmark Construction Difficulties
    2. Barclays Capital Family of Global Fixed-Income Indexes
    3. Merrill Lynch Fixed-Income Index Family
    4. J.P. Morgan Family of Fixed-Income Indexes
  35. Chapter 30 Real Estate Benchmarks
    1. Real Estate Index Construction Issues
    2. Private Real Estate Indexes
    3. Publicly Traded Real Estate Security Indexes
  36. Chapter 31 Hedge Fund Universes
    1. Hedge Funds as Absolute Return Strategies
    2. Hedge Fund Indexes
    3. Building a Good Hedge Fund Index
    4. Inherent Problems with Universes of Hedge Funds
    5. Available Hedge Fund Indexes
  37. Chapter 32 Determining Investment Style
    1. Approaches to the Style Classification Problem
    2. Effective Mix: A Returns-Based Methodology
    3. Effective Mix Limitations and Maximizing Usefulness
    4. Conclusion
  38. Chapter 33 GIPS: Global Investment Performance Standards
    1. The Reason for GIPS
    2. Overview of GIPS
  39. Index
  40. Footnote

Product information

  • Title: Portfolio Performance Measurement and Benchmarking
  • Author(s): Jon A. Christopherson, David R. Carino, Wayne E. Ferson
  • Release date: August 2009
  • Publisher(s): McGraw-Hill
  • ISBN: 9780071713665