Investment Portfolio Management PDF

MANAGEMENT OF FIXED INCOME INVESTMENT Reporters; SANTISAS, MARRY APLLE URQUIA, RITCHEPE MUNOZ, JANETH OCOY, JAYSON  INTRODUCTION Fixed income investments represent debt securities that offer investors a fixed stream of income in th...

MANAGEMENT OF FIXED INCOME INVESTMENT Reporters; SANTISAS, MARRY APLLE URQUIA, RITCHEPE MUNOZ, JANETH OCOY, JAYSON  INTRODUCTION Fixed income investments represent debt securities that offer investors a fixed stream of income in the form of interest payments. these investments typically involve lending money to a borrower ( government, corporation, or other entity) in exchange for predetermined interest payments and return of the principal amount of maturity. HOW IT WORKS? Understanding Fixed Income Companies and Governments issues debt securities to raise money to fund day-to-day operations and finance large projects. These fixed-income instruments pay a set interest rate return in exchange for investors lending their money. At the maturity date, investors are repaid the original amount that they investment. This amount is known as the principal.  KEY CHARACTERISTICS OF FIXED INCOME SECURITIES Fixed Interest payments: Investors receive regular interest payments based on a predetermined interest rate. Maturity date: The principal amount is repaid on a specific date in the future. Credit risk: The risk that the borrower may default on their obligations. Interest rate risk: The rate that changes in interest rates will affect the value of the investment. Lorem ipsum dolor sit amet, TYPES OF FIXED INCOME PRODUCT Treasury bills: are short-term fixed income securities that mature within one year and that do not make coupon payments Treasury notes: Have maturities between two and 10 years, pay a fixed interest rate, and are sold in multiples of $100 Treasury bonds: function similarity to the T-note accept that they mature in 20 or 30 years. treasury bonds can be purchased in multiples of $100 MISSION Treasury inflation- protected securities: Protect investors from inflation. the principal amount of a TIPS bond adjust with inflation ad deflation. A Municipal Bond is similar to a treasury as it is government-issued, but it is issued and backed by a state, municipality, or country, instead of the federal government. Corporate bonds become in various types, and the price and the interest rate offered largely depend on the company’s Financial stability and creditworthiness. Bonds with higher credit ratings typically pay lower coupon rates. Junk funds- also called high-yield bonds are corporate issues that pay a greater coupon due to a higher risk of default. BOND FUNDAMENTAL Fixed Income Security -issuer (borrower) agrees to make income payments fixed by contract Bonds (debt obligations) - borrower makes interest payments Preffered Stock - an equity issue with fixed income payments of dividends Term to maturity - date when debt ceases, with maturity being that exact date and term demoting the number of yearstill that date. Par Value (maturity value face value) - amount issues agrees to pay at maturity Coupon - periodic interest payment made to bondholders. Coupon Rate - rate of interest usually paid semiannually for U.S issues; multiplied by par value yields dollar value of coupon.  BOND FUNDAMENTAL Zero-coupon bonds - no periodic interest payments: principal and interest paid at term Floating rate security - coupon rate is reset periodically MUNICIPAL SECURITIES These debt obligations are issued by state and local governments Their structures are either serial maturity or term maturity. Serial maturity - portion of the debt is retired each year Term maturity - debt is retired in maturities ranging from 20-40 years with singking fund provision beginning 5-10 years prior to maturity. Types of municipal securities General obligation bonds Revenue bonds Hybrid bonds GENERAL OBLIGATION BONDS Many general obligation bonds are secured by the issuers unlimited taxing power. Limited-tax general obligation bonds - backed by taxes that are limited as to revenue source. Full faith and credit obligations - used by larger issuers who have access to taxes beyond property taxes. Double-barreled - revenue source includes fees, grants, etc. as well as taxing power.  REVENUE BONDS These are bonds issued by project or enterprise financing where the revenues from the project are promised to the bondholders. Examples include airports, universities, sports complex bonds and water revenue bonds. All revenues from the enterprise are placed in a revenue find with disbursements to funds covering -operation and maintenance fund -sinking fund -debt service reserve fund -renewal and replacement fund -reserve maintenance fund - surplus fund HYBRID BOND SECURITES Insured bonds - backed by insurance policies written commercially in addition to the credit of municipal issuer. Refunded bonds (prefunded bonds) - originally issued as G.O. or revenue bonds are now secured by an escrow fund consisting of U.S government obligations.  EUROBONDS A. Eurobonds 1. underwritten by an international syndicate 2.offered, as it issuance, simultaneously to investors in a number of countries 3.issued outside the jurisdiction of any single country. 4.mostly traded in OTC market Euro starights - fixed rate coupon bond with annual coupons Dual currency issues - interest and principal are paid in different currencies Convertible Eurobond - can be converted to another asset Many Eurobonds with attached warrants.  PREFFERED STOCK Preffered stock is not a debt instrument but a senior security with dividends set a percentage of par value (dividend rate) -Dividends are a distribution of earnings. However 70% of this is income is exempt for federal taxation if the recipient is a qualified corporation. -Promised returns to holders of preferred are fixed. -Preffered holders have priority over common stockholders for dividends and liquidation and distribution. Cumulative preffered - if issuer cannot make a payment, the dividends accrues until fully paid. Non-cumulative preffered - if issuer cannot make a payment owner forgos the payment. Perpetual preffered - issues without a maturity date.  STRIPPED MORTGAGE-BACKED SECURITIES Instead of dividing the cash flow from the underlying pool on a pro rata basis, stripped mortgage-backed securities distributethe principal and interest unequally. Principal and interest are divided between two classes ASSET-BACKED SECURITIES Securities backed by Credit card receivables Auto Loans Home equity loans Manufactured housing loans CREDIT RISK In analyzing the risk of asset-backed securities we focus on: 1.Credit rating of the collateral 2.Quality of the seller/servicer 3.Cash flow stress and payment structure 4.Legal structure HOW TO INVEST IN FIXED INCOME 1.For those who wants to 2. Fixed income ETFs work 3. Investors can also use a select individual bonds, much like a mutual fund, but laddering strategy when fixed-income mutual may be more accessible and investing in fixed income. A funds (bond funds) more cost-effective to provide exposure to laddering strategy offers steady individual investors. These interest income that arises various bonds and debts instruments. These funds ETFs may target specific credit from investing in a series of give the investor an ratings, durations, or other short-term bonds with different income stream and factors. ETFs also carry a maturities. professional portfolio professional management mangement expense. MAJOR ASSETS CLASS, FIXED INCOME SECURITIES CALCULATING BOND VALUES: YIELD TO MATURITY AND DURATION Lorem ipsum dolor sit amet,  YIELD TO MATURITY (YTM) YTM represents the annualized rate of return an investor can expect to earn if they hold a bond until its maturity date, assuming all coupon payments are made as schedule and reinvested at the same rate. it is widely used metric for comparing the attractiveness of different bonds. CALCULATING YTM FORMULA YTM = [YTM = [C + (FV - PV) / N] / [(FV + PV) / 2 SERVICE 01 SERVICE 03 Where: - C is the coupon payment - FV is the face value of the bond SERVICE 04 - PV is the bond's current market price - N is the number of compounding periods  CALCULATING YTM FORMULA Example Let's consider a bond with a face value of $1,000, a coupon rate of 5%, a maturity date of 5 years, and a current market price of $950. The bond pays annual coupons. SERVICE 01 SERVICE 03 1. Calculate the coupon payment: C = 5% * $1,000 = $50 2. Determine the number of compounding periods: N = 5 years * 1 coupon payment per year = 5 SERVICE 04 3. Plug the values into the YTM formula: plaintext Copy YTM = [$50 + ($1,000 - $950) / 5] / [($1,000 + $950) / 2] YTM = $55 / $975 = 0.0564 or 5.64% Therefore, the YTM for this bond is approximately 5.64%.  DURATION -Measures the sensitivity of a bond's price to changes in interest rates. It is expressed in years and represents the weighted average time until a bond's cash flows are received, with the weights being the present values of the cash flows as a percentage of the bond's price. CALCULATING DURATIONS DURATION = (Σ [T * PV(CT)] / P) WHERE: - T IS THE TIME UNTIL THE T-TH COUPON PAYMENT IN YEARS - PV(CT) IS THE PRESENT VALUE OF THE T-TH COUPON PAYMENT - P IS THE BOND'S CURRENT MARKET PRICE  DIVERSIFICATION A DIVERSIFICATION STRATEGY IS A PRACTICE THAT COMPANIES USE TO HELP EXPAND THEIR BUSINESS. BY BRANCHING OUT INTO NEW PRODUCT OFFERINGS OR MARKETS, COMPANIES CAN PROMOTE FINANCIAL SECURITY, INDUSTRY GROWTH AND THE ACQUISITION OF A LARGER TARGET AUDIENCE.  DURATION -A LONG-DURATION SERVICE 01 STRATEGY DESCRIBES AN INVESTING SERVICE 03 APPROACH IN WHICH AN INVESTOR FOCUSES ON BONDS WITH A HIGH DURATION VALUE. THE INVESTOR IS LIKELY BUYING BONDS WITH A LONG TIME BEFORE MATURITY AND GREATER SERVICE 04 EXPOSURE TO INTEREST RATE RISKS.  HEDGING -IS A RISK MANAGEMENT STRATEGY EMPLOYED TO OFFSET LOSSES IN INVESTMENTS BY TAKING AN OPPOSITE POSITION IN A RELATED ASSET. THE REDUCTION IN RISK PROVIDED BY HEDGING ALSO TYPICALLY RESULTS IN A REDUCTION IN POTENTIAL PROFITS.  ACTIVE MONITORING -IS A SYSTEM OF MONITORING TO ENSURE THAT H&S STANDARDS SERVICE 01 ARE CORRECT IN THE WORKPLACE BEFORE ACCIDENTS OR SERVICE 03 INCIDENTS ARE CAUSED. ACTIVE MONITORING REFERS TO MONITORING CARRIED OUT PRIOR TO ADVERSE EVENTS SERVICE 04 OCCURRING, FOR EXAMPLE, HOUSEKEEPING CHECKS, HEALTH AND SAFETY INSPECTIONS, AND AUDITS.  YIELD CURVE ANALYSIS -RIDING THE YIELD CURVE IS A TRADING STRATEGY THAT INVOLVES BUYING A LONG-TERM BOND AND SELLING IT BEFORE IT MATURES SO AS TO PROFIT FROM THE DECLINING YIELD THAT OCCURS OVER THE LIFE OF A BOND. INVESTORS HOPE TO ACHIEVE CAPITAL GAINS BY EMPLOYING THIS STRATEGY. THANK YOU GROUP 10 Behavioral Finance Explaining Biases Fusion Investing Startegies  is a sub-field of behavioral economics. It proposes psychology-based theory to explain stock market anomalies, such as severe rises of falls in stock price. The purpose is to identify and understand why people make certain financial choices. It is assumed that the information structure and the characteristics of market participants systematically influence individuals’ investment decisions and market outcomes. Four Key Themes of behavioral finance characterized the fields are: 1. Heuristics 2. Framing 3. Emotions 4. Market Impact  Investors encounter various choices and these are basically mental shortcuts that simplify the complex method to make a judgement. The perception of choices that people have are strongly influenced of how choices are framed. It means choices depend on how question are framed, even though the objective facts remain constant.  Emotions and associated human unconscious needs, fantasies, and fears drive much decision of human beings and their decision making strategies. Standard finance argues that investors’ mistake would not affect market prices because when prices deviate from fundamental value, rational investor will exploit the mispricing of their own profit.  Loss Aversion Belief perseverance Anchoring Overconfidence Representativeness Confirmation Bias Self Attribution Bias Hindsight Bias Escalation Bias The propensity of investor to hold on to “ losers” too long and sell “ winners” too soon. Once people have formed an opinion they cling to it too tightly and for to long.  Individuals who are asked to estimate something, start with initial an arbitrary (casual) value, and then adjust from it. Causes analysts to overestimate growth grates for growth companies and overemphasize good news and ignore negative news for these firms. Causes analysts to overestimate growth grates for growth companies and overemphasize good news and ignore negative news for these firms.  Investor look for information that supports prior opinion and decision they made. People have a tendency to ascribe any success to their own talents while blaming any failure on their “bad luck”, which cause them to underestimate their own talent.  A tendency after an event for an individual to believe that he or she predicted it, which people think they can predict better than they can.  Causes investor to put more money into a failure that they feel responsible for rather than into success. The Integration of two element of investment valuation , the fundamental value and investor sentiment.  FUNDAMENTAL VALUE represents the objective, rational component of an asset's valuation based on economic and financial data. INVESTOR SENTIMENT represents the subjective, emotional component that can cause prices to deviate from their intrinsic value.  Self Awareness Diversification long term Perspective professional advice  Self Awareness Be aware of your own cognitive biases and emotional tendencies to avoid making impulsive decisions. Diversification Spread your investments across different asset classes to reduce risk and mitigate the impact of any single investment's performance. long term Perspective Focus on long-term goals and avoid short- term market fluctuations, as these can lead to emotional decision-making. professional advice Consider seeking advice from a financial advisor who can provide objective guidance and help you develop a sound investment plan. Members Homeres, Jhaiza Mae Quezada, Jevan Pedrablanca, Gemma Rose Duaso, Ruina  INVESTMENT AND PORTFOLIO MANAGEMENT PORTFOLIO REBALANCING AND OPTIMIZATION GROUP 9 PRESENTATION Dahonog, Laura Mae A. Lejeros, Ashley Shakira Baron, Fretchie WHAT IS REBALANCING? - refers to the process of returning the values of a portfolio’s asset allocations to the levels defined by an investment plan. Those levels are intended to match an investor’s tolerance for risk and desire for reward. HOW REBALANCING WORKS Portfolio rebalancing aims to protect investors from exposure to undesirable risks while providing exposure to reward. It can also ensure that a portfolio’s exposure remains within the portfolio manager’s area of expertise. WHEN TO REBALANCE While there is no required schedule for rebalancing a portfolio, it’s recommended that investors examine allocations at least once every year. Investors don’t have to rebalance but generally, that’s ill-advised.  TYPES OF REBALANCING: Calendar Rebalancing Percentage-of-Portfolio Rebalancing Constant Proportion Portfolio Insurance Smart Beta Rebalancing CALENDAR REBALANCING Is the most rudimentary rebalancing approach. This strategy involves analyzing and adjusting the investment holdings within the portfolio at predetermined times. PERCENTAGE-OF-PORTFOLIO REBALANCING A more responsive approach to rebalancing focuses on the allowable percentage composition of an asset in a portfolio. This is also known as a constant-mix strategy with bands or corridors. Example: An allocation strategy might include the requirement to hold 30% in emerging market equities, 30% in domestic blue chips, and 40% in government bonds with a corridor of +/- 5% for each asset class. CONSTANT PROPORTION PORTFOLIO INSURANCE is a type of portfolio insurance that allows the investor to set a floor on the dollar value of their portfolio and structure the asset allocation on it. How Constant Proportion Portfolio Insurance (CPPI) works? - The investor will make a beginning investment in the risky asset equal to the value of: (Multiplier) x (cushion value in dollars) and will invest the remainder in the conservative asset. SMART BETA REBALANCING Is a periodic rebalancing similar to the regular rebalancing that indexes undergo to adjust to changes in stock value and market capitalization.  EXAMPLES OF REBALANCING REBALANCING RETIREMENT REBALANCING FOR ACCOUNTS DIVERSIFICATION One of the most common areas investors look to rebalance is the allocations within their By having funds spread out across multiple retirement accounts. Asset performance stocks, a downturn in one will be partially impacts the overall value, and many investors offset by the activities of the others, which can prefer to invest more aggressively at younger provide a level of portfolio stability. ages and more conservatively as they approach retirement age.  REBALANCING ADVANTAGES : DISADVANTAGES: Rebalancing can keep investors’ Rebalancing involves transaction portfolios aligned with their risk costs, which may reduce net income. tolerance and need for a certain Selling securities that have amount of return. increased in value to rebalance a It maintains a pre-determined portfolio might lead to investors missing asset allocation set by an investment out on an upward price trend of those plan. securities. It’s a disciplined, unemotional Investing knowledge and investment approach that can reduce experience is required to rebalance as exposure to risk. needed and reduce exposure to risk It can be changed as investors’ appropriately. financial needs and investment goals Unnecessary rebalancing can change. increase costs for an investor. Rebalancing can be done by experienced individual investors or handled by portfolio managers. PORTFOLIO OPTIMIZATION - is a critical component of modern finance. At its core, portfolio optimization is the process of constructing an investment portfolio that maximizes returns while minimizing risk.  PORTFOLIO OPTIMIZATION METHODS Modern Portfolio Theory Mean-Variance Optimization Black-Litterman Model Monte Carlo Simulation Risk Parity  MODERN PORTFOLIO THEORY - MPT is based on the idea that investors can achieve the optimal balance of risk and return by diversifying their investments across a range of assets. Example: Suppose an investor has a two-asset portfolio worth $1 million. Asset X has an expected return of 5%, and Asset Y has an expected return of 10%. The portfolio has $800,000 in Asset X and $200,000 in Asset Y. Based on these figures, we can calculate the expected return of the portfolio overall: Portfolio expected return = [($800,000 / $1 million) x 5%] + [($200,000 / $1 million) x 10%] = 4% + 2% = 6%  MEAN-VARIANCE OPTIMIZATION - is a method of portfolio optimization that is based on MPT. Mean-variance optimization seeks to construct portfolios that maximize the expected return for a given level of risk. Example: Assume the following investments are in an investor’s portfolio: Investment A: Amount = $100,000 and expected return of 5% Investment B: Amount = $300,000 and expected return of 10% In a total portfolio value of $400,000, the weight of each asset is: Investment A weight = $100,000 / $400,000 = 25% Investment B weight = $300,000 / $400,000 = 75% Portfolio expected return = (25% x 5%) + (75% x 10%) = 8.75%.  MEAN-VARIANCE OPTIMIZATION Calculating the variance: The correlation between the two investments is 0.65. The standard deviation, or square root of variance, for Investment A is 7%, and the standard deviation for Investment B is 14%. The portfolio variance is: Portfolio variance = (25% ^ 2 x 7% ^ 2) + (75% ^ 2 x 14% ^ 2) + (2 x 25% x 75% x 7% x 14% x 0.65) = 0.0137 The portfolio standard deviation is the square root of the answer: 11.71%. BLACK-LITTERMAN MODEL - based on Bayesian statistics. - starts with an investor’s views on the expected returns of different asset classes or securities and then uses these views to construct portfolios that maximize expected returns while minimizing risk. MONTE CARLO SIMULATION - is a method of portfolio optimization that uses random sampling to estimate the probability distribution of returns for different asset classes or securities. RISK PARITY - is a method of portfolio optimization that seeks to achieve an equal risk contribution from each asset class or security in a portfolio.  FACTORS AFFECTING PORTFOLIO OPTIMIZATION RISK TOLERANCE MARKET CONDITIONS Investors with a high risk tolerance may be Market conditions, such as changes in more willing to accept higher levels of risk in interest rates, inflation, or economic exchange for potentially higher returns, while growth, can have a significant impact investors with a lower risk tolerance may be on portfolio optimization. more focused on achieving stable and predictable returns. INVESTMENT TIME HORIZON ASSET CLASS SELECTION Investors with a longer investment time horizon Different asset classes, such as stocks, may be able to take on more risk in their bonds, and commodities, have portfolios, while investors with a shorter time different risk and return characteristics. horizon may be more focused on preserving capital and achieving steady returns. CORRELATION AND COVARIANCE Assets that are highly correlated may not provide the same diversification benefits as assets that are uncorrelated or negatively correlated.  PORTFOLIO OPTIMIZATION TOOLS AND SOFTWARE ALGORITHMIC TRADING EXCEL SOLVER PLATFORMS PORTFOLIO OPTIMIZATION ROBO-ADVISORS SOFTWARE BENEFITS AND CHALLENGES IN PORTFOLIO OPTIMIZATION APPLICATIONS OF PORTFOLIO OPTIMIZATION ASSET ALLOCATION - involves dividing an investment portfolio among different asset classes, such as stocks, bonds, and commodities, to achieve a balance between risk and return. RISK - involve diversifyingMANAGEMENT across different asset classes and securities, or using hedging strategies to protect against specific risks. APPLICATIONS OF PORTFOLIO OPTIMIZATION PERFORMANCE EVALUATION - By comparing the actual performance of a portfolio to its expected performance, investors can identify areas where the portfolio may be underperforming and make adjustments accordingly. PORTFOLIO REBALANCING - is the process of adjusting the composition of a portfolio to bring it back in line with the investor’s target asset allocation. INVESTMENT AND PORTFOLIO MANAGEMENT Group 9 EVALUATION OF PORTFOLIO PERFORMANCE Presented by: GROUP - 8 GONZALES, STEPHANIE GRUMO, MERALYN SISTOSO, JOBELLE ANDREA BUHANGIN, FREDERICK Portfolio performance evaluation is an essential aspect of the investment process that allows investors and portfolio managers to assess the effectiveness of their investment strategies. The main goal of performance evaluation is to determine whether the chosen investment strategy is achieving the desired risk and return objectives. Benchmark Comparison - This Attribution analysis seeks to identify allows investors to determine the sources of a portfolio's whether the portfolio is performance, such as sector allocation, Risk Assessment - A crucial part of security selection, and interaction evaluating portfolio performance is outperforming or underperforming effects. This information can help assessing the level of risk taken by the the market or its peers, providing investors and portfolio managers make investor. This can be done by examining valuable insight into the more informed decisions about their the volatility of the portfolio, measured effectiveness of the investment investment strategies. by the standard deviation or other risk strategy. Attribution Analysis metrics, as well as the correlation of the portfolio's returns with the broader Benchmark Comparison Risk Assessment market. Components of Portfolio Performance Risk-adjusted performance metrics allow Evaluation investors to evaluate the effectiveness of a portfolio by considering both the returns Return Assessment Risk- Adjusted Performance generated and the level of risk taken to achieve those returns. Return assessment involves analyzing the returns generated by the portfolio over a specific period. This can include measures such as absolute returns, relative returns compared to a benchmark, or even risk-adjusted returns that take into account the level of risk taken to achieve the given returns.  BENCHMARK SELECTION AND COMPARISON Choosing an appropriate benchmark is crucial for meaningful performance evaluation. An accurate benchmark should have similar risk characteristics and investment objectives as the portfolio being evaluated to provide a fair comparison.  WHAT ARE BENCHMARKS? A benchmark is a standard that is used to measure the change in an asset's value or another metric over time. In investing, benchmarks are used as a reference point for the performance of securities, mutual funds, exchange-traded funds, portfolios, or other financial instruments. Types of Benchmarks MARKET INDICES PEER GROUP CUSTOM COMPARISONS BENCHMARKS Market indices, such as the Peer group comparisons Custom benchmarks are S&P 500 or the NASDAQ, are involve comparing a portfolio's created to match the specific common benchmarks used for performance to that of similar risk and return characteristics evaluating portfolio portfolios or investment funds. of a portfolio. They can be performance. These indices This method can help investors particularly useful for represent broad market gauge the effectiveness of their evaluating the performance of performance and can be portfolio manager relative to portfolios with unique useful for comparing the other managers with similar investment objectives or performance of a portfolio to investment strategies. strategies that may not be the overall market. well-represented by market indices or peer groups.  Attribution analysis, also known as “return attribution” or “performance attribution,” is an evaluation tool What is used to explain and analyze a Attribution portfolio’s performance against a particular benchmark. It is used to Analysis? identify sources of excess returns from a firm or fund manager’s active investment decisions.  Components of Attribution Analysis ALLOCATION EFFECT SELECTION EFFECT INTERACTION EFFECT The interaction effect is the The allocation effect measures The selection effect measures combination of the selection the impact of asset allocation the impact of security and allocation effect. If the decisions on the active return. selection decisions on the portfolio allocation outweighs It reflects the difference active return. It reflects the and outperforms the between the portfolio weights difference between the benchmark, the interaction and benchmark weights, portfolio returns and effect is positive, and vice multiplied by the benchmark benchmark returns for each versa. The interaction effect is returns. security, multiplied by the essentially the cumulative portfolio weights. effect created by asset allocation, security selection, and other investment decisions made by the portfolio manager. Assessing portfolio performance relative to benchmarks and peers is a vital component of investment management. By using absolute and relative return measures, risk-adjusted performance metrics, and attribution analysis, investors can gain a comprehensive understanding of how well their portfolios are performing. This analysis helps in identifying strengths, weaknesses, and opportunities for improvement, ultimately leading to more informed investment decisions.  Key Performance Metrics Absolute Measure Risk-Adjusted Return Performance Return Measures Attribution Total Return Sharpe Ratio Allocation Effect Compound Annual Jensens Alpha Selection Effect Growth Rate Treynor Ratio Interaction Effect (CAGR) Information Ratio  Absolute Return Measure TOTAL RETURN is a measure of the total gain or loss of a portfolio over a specific period, expressed as a percentage of the initial investment. It includes both capital gains and any income generated, such as dividends or interest. Compound Annual Growth Rate (CAGR) CAGR is a measure of the average annual growth rate of a portfolio over a specific period. It is a useful metric for comparing the performance of different investments, as it smooths out the effects of short-term fluctuations and provides a standardized measure of growth.  COMPOSITE PORTFOLIO PERFORMANCE MEASURE In investment and portfolio management, evaluating performance is crucial for ensuring that strategies meet their objectives. Composite portfolio performance measures, such as the Sharpe Ratio, Jensen's Alpha, Treynor Ratio, and Information Ratio, help assess both return and risk, providing a comprehensive view of portfolio effectiveness. This report explores the major composite portfolio performance measures: Sharpe Ratio, Jensen's Alpha, Treynor Ratio, and Information Ratio. Each of these metrics serves a unique purpose in assessing the effectiveness of a portfolio's performance, helping investors make informed decisions.  Jensen's Alpha, or simply alpha, measures a portfolio's excess return relative to its expected return, based on the Capital Asset Pricing Model (CAPM). Alpha represents the portion of the portfolio's return that cannot be explained by market movements, and is often considered a measure of a manager's skill. If alpha is significantly positive, this is evidence of superior performance If alpha is significantly negative, this is evidence of inferior performance. If alpha is insignificantly different from zero, this is evidence that the portfolio manager matched the market on a risk-adjusted basis. The Sharpe Ratio is a measure of risk-adjusted return, developed by Nobel laureate William F. Sharpe. It evaluates the excess return of a portfolio (i.e., the return above the risk-free rate) relative to its total risk, measured by standard deviation.  This measure indicates the risk premium return earned per unit of total risk. In terms of capital market theory, this portfolio performance measures total risk to compare portfolios to the CML, whereas the Treynor measure examines portfolio performance in relation to SML.  The Treynor Ratio, named after Jack Treynor, measures the risk- adjusted return of a portfolio using beta (systematic risk) instead of standard deviation. It evaluates the excess return generated per unit of market risk. To identify risk due to market fluctuations, he introduced the characteristic line, which defines the relationship between the rates of return for a portfolio over time and the rates of return for an appropriate market portfolio. Characteristic line's slope measures the relative volatility of the portfolio's returns in relation to returns for the aggregate market. This slope is the portfolio's beta coefficient (β)  Treynor Vs Sharpe Measures The Sharpe portfolio performance measure uses standard deviation of returns as the measure of riskwhereas uses Treynor performance measure uses beta (systematic risk) The Sharpe measure, therefore, evaluates the portfolio manager on the basis of both rate of return performance and diversification. For a completely diversified portfolio, one without any unsystematic risk, the two measures give identical rankings because the total variance of the completely diversified portfolio is its systematic variance. Alternatively, a poor diversified portfolio could have a high ranking on the basis of the Treynor performance measure but a much lower ranking on the basis of the Sharpe performance measure. Any difference in rank would come directly from a difference in diversification. Both measures produce relative not absolute rankings of performance. The Information Ratio evaluates a portfolio's excess return relative to its benchmark, divided by the tracking error (the standard deviation of the portfolio's excess returns). It measures the consistency of a portfolio's active return. This measure indicates the risk premium return earned per unit of total risk. In terms of capital market theory, this portfolio performance measures total risk to compare portfolios to the CML, whereas the Treynor measure examines portfolio performance in relation to SML.  Composite portfolio performance measures like Sharpe Ratio, Jensen's Alpha, Treynor Ratio, and Information Ratio offer valuable insights into an investment portfolio's risk and return characteristics. These measures help investors assess risk-efficient portfolios and make informed decisions. Understanding these metrics is crucial for investment and portfolio management, as they help evaluate and optimize strategies, ultimately enhancing the long-term performance of investments. Therefore, they are essential for investors and portfolio managers. THANK YOU!!!!