Ch. 25

1
Ch. 25 PORTFOLIO RETURN MEASURES I. Single
period A. Holding period return (over period
t) rt Dividend yield capital gains yield
Dt/P0 (Pt - P0)/P0 (Pt
Dt - P0) / P0 where rt return earned during
period t Dt period cash flows (dividends or
interest) Pt price at end of period t P0
price at beginning of period t II. Multiperiod
A. Annualized return rann (1
rt)1/T - 1 where T number of years in
evaluation period
2
PORTFOLIO PERFORMANCE I. Risk unadjusted
performance A. Dollar-weighted rate
of return (DWROR) MV0 S CFt / (1 rdw)t
CFT MVT / (1 rdw)T where MV0
beginning market value CFt cash flows
during time t MVT ending market value
rdw DWROR IRR YTM 1. Return actually
earned by investor B. Time-weighted
return (TWROR) rtw P(1 rit)1/T -
1 1. Return assessed to investment
manager 2. Required by Global Investment
Performance Standards (GIPS) II.
Relationship between DWROR TWROR
3

• ABSOLUTE PORTFOLIO PERFORMANCE EVALUATION
• Jensen (1968) measure (alpha)
• A. Single-index model
• (rpt - RFt) aP bP (Rmt - Rft)
  ePt
• 1. Statistically significant pos. (neg.) aP
  
• indicates superior (inferior)
  performance
• B. Four-factor model (p. 284)
• (RptRFt) ai0 bi1(RmtRFt) bi2SMBt bi3HMLt
  bi4UMDt e.
• 1. Fama-French (1992) factors
• a. SMB (small minus big)
  size
• b. HML (high minus low)
  valuation
• 2. Carhart (1997) factor

4
RELATIVE PORTFOLIO PERFORMANCE EVALUATION I.
Ratios A. Sharpe (1966)
1. Avg. excess return / per unit of total
risk B. Treynor (1965) 1.
Avg. excess return / per unit of systematic
risk C. Information
1. Avg. return / per unit of
unsystematic risk