Portfolio Performance Measures

James W. Kolari (), Wei Liu () and Seppo Pynnönen ()
Additional contact information
James W. Kolari: Texas A&M University
Wei Liu: Texas A&M University
Seppo Pynnönen: University of Vaasa

Chapter Chapter 6 in Professional Investment Portfolio Management, 2023, pp 97-119 from Springer

Abstract: Abstract The true market portfolio of the CAPM on the efficient frontier (located at the tangent point of the line extending from the riskless rate) is not observable in the real world. Sharpe received the Nobel Prize in Economics for developing the CAPM and proposed that portfolio performance can be compared by computing their excess returns divided by the standard deviation of returns (or total risk). This so-called Sharpe ratio is one of the most widely used measures of portfolio efficiency. However, it does not take into account beta risk in the CAPM. In this regard, Gibbons et al. (Econometrica 57:1121–1152, 1989) (GRS) proposed a test of whether any particular portfolio is ex ante mean-variance efficient in the context of the market model version of the CAPM. More specifically, they modified the Hotelling $$T^2$$ T 2 test to take into account whether a portfolio lies on the efficient frontierEfficient frontier. While the Sharpe ratio and GRS test are prominent in academic studies on portfolio performance, practitioners have developed other metrics to evaluate portfolio performance. One such popular measure is drawdowns, which is tantamount to value at risk (VaR). If a portfolio exhibits high periodic drawdowns, it is necessary to carefully evaluate the potential gains in the long run that may serve to counterbalance this risk.

Keywords: Alpha; Arithmetic mean; Annualized returns; Average daily returns; CAPM; Continuously compounded returns; CRSP index; Decay factor; Drawdown; Duration; Exponentially weighted moving average (EWMA); Geometric mean; Gibbons; Ross; and Shanken (GRS) test; Global efficiency; Gross log return; Gross return; Internal rate of return (IRR); Jensen’s alpha; Log returns; Manipulation-proof performance measure; Market timing; Markowitz investment parabola; Maximum drawdown; Morningstar Risk Adjusted Measure (MARR); Natural logarithm; Optimal orthogonal portfolio (OOP); Portfolio returns; Probability distribution; Recovery; Return metrics; RiskMetrics variance model; Riskfree rate; Sharpe ratio; Simple returns; S&P 500 index; Time-weighted return; Treynor measure; Trough; Value at risk (VaR) (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-48169-7_6

Ordering information: This item can be ordered from
http://www.springer.com/9783031481697

DOI: 10.1007/978-3-031-48169-7_6

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().