CHAPTER 6Comparing Two Portfolio Returns1

When evaluating the performance of a portfolio, analysts usually compare the return to some reference point. The reference point may be a cash return, for example, which might be regarded as risk-free; in this case the comparison would measure the additional return obtained from investing in risky assets. Most often, the reference point is provided by another portfolio, one that may be constructed in a particularly simple fashion and thought to provide a baseline for the comparison; in this case, the comparison would measure the additional return obtained from active management of the portfolio. In any case, the reference portfolio against which a portfolio is to be compared is a benchmark portfolio

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