Holding Period
Simple yet important measure used to calculate the return on an investment over the period of time it is held
R = D+ V1 - V0 / V0
Money Weighted Rate of Return
Measures overall return on capital invested over a specified period
Adjusts for Cash flows
New funds are invested or withdrawn during the year, calculation is modified to allow for differences in the timing
If income is received and invested straight away, it can be ignored
Initial portfolio, plus net new money, must earn in a deposit account to equal the portfolio actual value at the year end
Drawbacks
- Not appropriate when comparing different portfolios
Time Weighted Rate of Return
TWR Attempts to eliminate the distortions caused by the timing of new money by breaking down the return for a particular period into sub periods between each addition or withdrawal of capital
Measure risk adjusted returns
Sharp Ratio
- Higher the Sharpe ratio the better the return on an investment
- Negative ratio indicates risk free asset would have performed better than the investment being analysed
Alpha
- Value added by manager
Information ratio
- Consistency which a manager beats a benchmark index
- The higher the value, the higher the value added by the manager by active management
Performance Attribution
Achieve results from the following:
- Asset allocation
- Stock selection
- Market timing
- Risk
