Podcast
Questions and Answers
What is the main goal of portfolio performance evaluation?
What is the main goal of portfolio performance evaluation?
What is the key distinction between traditional performance measures and conditional performance measures?
What is the key distinction between traditional performance measures and conditional performance measures?
What is the significance of conditional measures in portfolio performance evaluation?
What is the significance of conditional measures in portfolio performance evaluation?
Which model extends the Fama-French model with a momentum factor?
Which model extends the Fama-French model with a momentum factor?
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What does the construction of size and book-to-market factors in finance rely on?
What does the construction of size and book-to-market factors in finance rely on?
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What do conditional models allow to vary over time based on lagged public information?
What do conditional models allow to vary over time based on lagged public information?
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What does successful market timing strategy imply in terms of betas?
What does successful market timing strategy imply in terms of betas?
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What does Conditional Jensen's alpha account for?
What does Conditional Jensen's alpha account for?
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What do investors' expectations and second moments vary over, impacting portfolio returns?
What do investors' expectations and second moments vary over, impacting portfolio returns?
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What do factors like size and book-to-market ratio explain changes in?
What do factors like size and book-to-market ratio explain changes in?
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What does the four-factor model proposed by Carhart add to the Fama-French model?
What does the four-factor model proposed by Carhart add to the Fama-French model?
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Which measure allows portfolios' risk and market premiums to vary over time with the state of the economy?
Which measure allows portfolios' risk and market premiums to vary over time with the state of the economy?
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What is the major shortcoming of traditional (unconditional) performance measures?
What is the major shortcoming of traditional (unconditional) performance measures?
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Which measure focuses on downside risk by considering returns below a specified required rate of return?
Which measure focuses on downside risk by considering returns below a specified required rate of return?
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What does the Sharpe ratio measure?
What does the Sharpe ratio measure?
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Which measure appraises the expected return from an active management strategy divided by the cost of such strategy?
Which measure appraises the expected return from an active management strategy divided by the cost of such strategy?
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What is the drawback of the Sharpe ratio?
What is the drawback of the Sharpe ratio?
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What does Modigliani and Modigliani Ratio (M & M) measure?
What does Modigliani and Modigliani Ratio (M & M) measure?
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What is the Sharpe ratio calculated as?
What is the Sharpe ratio calculated as?
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What does the Information Ratio (IR) measure?
What does the Information Ratio (IR) measure?
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What is the drawback of the Sharpe ratio?
What is the drawback of the Sharpe ratio?
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What does Sortino Ratio (SR) focus on?
What does Sortino Ratio (SR) focus on?
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What does the Sharpe standard deviation measure consider?
What does the Sharpe standard deviation measure consider?
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What does the Treynor Ratio require for its calculation?
What does the Treynor Ratio require for its calculation?
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For which type of portfolio is the Treynor Ratio most relevant?
For which type of portfolio is the Treynor Ratio most relevant?
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What is Value at Risk (VAR) primarily concerned with?
What is Value at Risk (VAR) primarily concerned with?
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What does Jensen's Alpha measure?
What does Jensen's Alpha measure?
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What does the addition of a quadratic term in the Treynor & Mazuy Measure aim to distinguish?
What does the addition of a quadratic term in the Treynor & Mazuy Measure aim to distinguish?
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What additional term does the Henriksson & Merton Measure include?
What additional term does the Henriksson & Merton Measure include?
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What do traditional performance measures assume about risk over time?
What do traditional performance measures assume about risk over time?
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What do empirical results using Treynor & Mazuy and Henriksson & Merton models indicate about passive investment strategies?
What do empirical results using Treynor & Mazuy and Henriksson & Merton models indicate about passive investment strategies?
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What should theoretically be generated by a passive strategy according to Treynor & Mazuy and Henriksson & Merton models?
What should theoretically be generated by a passive strategy according to Treynor & Mazuy and Henriksson & Merton models?
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What is a potential explanation for the puzzling findings of Treynor & Mazuy and Henriksson & Merton models?
What is a potential explanation for the puzzling findings of Treynor & Mazuy and Henriksson & Merton models?
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What does the sensitivity of Jensen's alpha to the market index imply?
What does the sensitivity of Jensen's alpha to the market index imply?
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Which measure is revisited, suggesting the use of financial analysts' forecasts/expectations interacted with $(RMt - Rft)$?
Which measure is revisited, suggesting the use of financial analysts' forecasts/expectations interacted with $(RMt - Rft)$?
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What does the proposed equation include to capture the switch from one regime to another?
What does the proposed equation include to capture the switch from one regime to another?
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What does the traditional Henriksson & Merton model criticize for not considering relevant information?
What does the traditional Henriksson & Merton model criticize for not considering relevant information?
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What is advocated for in evaluating portfolio performance?
What is advocated for in evaluating portfolio performance?
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Which model is suggested as an alternative to better reflect managers' expectations about the future state of the economy?
Which model is suggested as an alternative to better reflect managers' expectations about the future state of the economy?
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What is the proposed approach to constructing in both bull and bear market periods?
What is the proposed approach to constructing in both bull and bear market periods?
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What is suggested as an alternative to the traditional Henriksson & Merton model?
What is suggested as an alternative to the traditional Henriksson & Merton model?
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What is the focus of the proposed equation in capturing the switch from one regime to another?
What is the focus of the proposed equation in capturing the switch from one regime to another?
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Which model is suggested as an alternative to better reflect managers' expectations about the future state of the economy?
Which model is suggested as an alternative to better reflect managers' expectations about the future state of the economy?
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What does the Ferson & Schadt measure suggest the use of interacted with $(R_{Mt} - R_{ft})$?
What does the Ferson & Schadt measure suggest the use of interacted with $(R_{Mt} - R_{ft})$?
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What does the paper suggest the need for in measuring portfolio performance?
What does the paper suggest the need for in measuring portfolio performance?
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What does the authors advocate for in evaluating portfolio performance?
What does the authors advocate for in evaluating portfolio performance?
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What do regime switching models like STAR and TAR aim to better reflect?
What do regime switching models like STAR and TAR aim to better reflect?
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What does the proposed equation include to capture the switch from one regime to another?
What does the proposed equation include to capture the switch from one regime to another?
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What does the Ferson & Schadt measure aim to revisit and suggest the use of?
What does the Ferson & Schadt measure aim to revisit and suggest the use of?
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What do the authors propose new avenues for in the context of portfolio performance?
What do the authors propose new avenues for in the context of portfolio performance?
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Study Notes
Portfolio Performance Measurement and Research
- Increasing demand for reliable performance measures due to the surge in investment in mutual and exchange traded funds by small investors globally
- Research provides a comprehensive overview of portfolio performance measures, discussing their limitations and categorizing them based on properties and objectives
- Distinguishing between traditional (unconditional) and conditional performance measures, with traditional measures influenced by the Capital Asset Pricing Model (CAPM)
- Major shortcoming of traditional measures is the assumption of constant risk over the evaluation period
- Conditional performance measures allow portfolios' risk and market premiums to vary over time with the state of the economy, with recent empirical findings showing improved investor perception
- Proposal of improvements to existing approaches and identification of new avenues for future research
- Unconditional performance evaluation includes measures computed as a ratio, with the most common being the Sharpe ratio
- Sharpe ratio calculated as the ratio of portfolio return in excess of risk-free rate over its standard deviation, derived from Markowitz portfolio theory
- Drawbacks of Sharpe ratio include difficulty in interpretation when excess return is negative, assumption of normal distribution of portfolio returns, and lack of consideration for higher moments
- Introduction of new measures within the category of unconditional performance evaluation, such as the Information Ratio (IR), Modigliani and Modigliani Ratio (M & M), and Sortino Ratio (SR)
- Information Ratio (IR) measures managers' ability to generate higher returns relative to a benchmark portfolio and appraises the expected return from an active management strategy divided by the cost of such strategy
- Modigliani and Modigliani Ratio (M & M) measures the returns of a portfolio relative to a benchmark, considering the amount of portfolio risk, and Sortino Ratio (SR) focuses on downside risk by considering returns below a specified required rate of return
Revisiting Portfolio Performance Measures
- The paper proposes a new approach to constructing a "hedge market timing portfolio" in both bull and bear market periods.
- The proposed model includes a market timing factor (AMB) and dummy variables for bull and bear markets.
- The traditional H&M model is criticized for not considering relevant information linked to the duration and magnitude of bull and bear markets.
- Regime switching models like STAR and TAR are suggested as alternatives to better reflect managers' expectations about the future state of the economy.
- The proposed equation includes a smooth transition continuous function (F) to capture the switch from one regime to another.
- The Ferson & Schadt measure is revisited, suggesting the use of financial analysts' forecasts/expectations interacted with (RMt − Rft).
- The research aims to revisit and extend the main measures of portfolio performance to control for risk-time variations and include multiple risk factors.
- The paper highlights that early traditional performance measures do not consider risk-time variations and multiple risk factors, leading to negative average fund performance.
- The authors propose new avenues for future research and improvements to existing measures.
- References to seminal works on portfolio performance are provided, including Ferson & Schadt (1996), Sharpe (1966), Markowitz (1952), Sortino (1994), Modigliani (1997), Treynor (1965), Roll (1977), and Jensen (1968).
- The paper suggests the need for standardized risk-adjusted measures in measuring portfolio performance.
- The authors advocate for the consideration of multiple risk factors and the control for risk-time variations in evaluating portfolio performance.
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