SECURITY ANALYSIS PORTFOLIO MANAGEMENT PORTFOLIO PERFORMANCE EVALUATION MADE

  • Slides: 27
Download presentation
SECURITY ANALYSIS & PORTFOLIO MANAGEMENT PORTFOLIO PERFORMANCE EVALUATION MADE BY: Dimple Garg -112 Ginni

SECURITY ANALYSIS & PORTFOLIO MANAGEMENT PORTFOLIO PERFORMANCE EVALUATION MADE BY: Dimple Garg -112 Ginni Kumar -152

INTRODUCTION • PORTFOLIO MANAGERS HAVE TO EVALUATE THEIR PERFORMANCE TO IDENTIFY THE SOURCES OF

INTRODUCTION • PORTFOLIO MANAGERS HAVE TO EVALUATE THEIR PERFORMANCE TO IDENTIFY THE SOURCES OF STRENGTHS AND WEAKNESSES. • PERFORMANCE EVALUATION FORMS THE BASIS OF PORTFOLIO REVISION. • IT IS DEFINED AS A FEEDBACK AND CONTROL MECHANISM.

METHODS OF ASSESSING PERFORMANCE • RETURN PER UNIT OF RISK • DIFFERENTIAL RETURN •

METHODS OF ASSESSING PERFORMANCE • RETURN PER UNIT OF RISK • DIFFERENTIAL RETURN • COMPONENTS OF PERFORMANCE

1) RETURN PER UNIT OF RISK • THE FIRST MEASURE OF RISK ADJUSTED PERFORMANCE

1) RETURN PER UNIT OF RISK • THE FIRST MEASURE OF RISK ADJUSTED PERFORMANCE ASSESSES THE PERFORMANCE OF A FUND IN TERMS OF RETURN PER UNIT OF RISK. • FUNDS THAT PROVIDE THE HIGHEST RETURN PER UNIT OF RISK WOULD BE ADJUSTED AS THE BEST PERFORMERS AND THE FUNDS THAT PROVIDE THE LOWEST RETURN PER UNIT OF RISK WOULD BE THE POOREST PERFORMERS.

METHODS OF DETERMINING THE RETURN PER UNIT OF RISK • REWARD TO VOLATILITY RATIO

METHODS OF DETERMINING THE RETURN PER UNIT OF RISK • REWARD TO VOLATILITY RATIO DEVELOPED BY WILLIAM SHARPE. • REWARD TO VOLATILITY RATIO DEVELOPED BY JACK TREYNOR.

 • EVALUATION HAS TO TAKE INTO ACCOUNT WHETHER THE PORTFOLIO IS SECURING ABOVE

• EVALUATION HAS TO TAKE INTO ACCOUNT WHETHER THE PORTFOLIO IS SECURING ABOVE AVERAGE RETURNS, AVERAGE RETURNS OR BELOW AVERAGE RETURNS AS COMPARED TO THE PREVAILING RATE OF RETURN IN THE MARKET. • DIVERSIFICATION CAN REDUCE THE MARKET RELATED RISK AND MAXIMISE THE RETURNS FOR A GIVEN LEVEL OF RISK. • THE EVALUATORS MUST TAKE INTO CONSIDERATION : a) THE RATE OF RETURNS b) EXCESS RETURN OVER RISK FREE RATE c) LEVEL OF SYSTEMATIC, UNSYSTEMATIC

2) DIFFERENTIAL RETURN • DIFFERENTIAL RETURN WAS DEVELOPED BY MICHAEL JENSEN. • OBJECTIVE OF

2) DIFFERENTIAL RETURN • DIFFERENTIAL RETURN WAS DEVELOPED BY MICHAEL JENSEN. • OBJECTIVE OF THIS TECHNIQUE IS TO CALCULATE THE RETURN THAT SHOULD BE EXPECTED FOR THE FUND GIVEN THE REALIZED RISK OF THE FUND. • COMPARING THE CALCULATED RETURN WITH THE ACTUALLY REALIZED RETURN. • INVESTOR PLAYS A VERY PASSSIVE ROLE.

3) COMPONENTS OF PERFORMANCE • THE MORE USEFUL MEASURE WOULD BE TO ASSESS THE

3) COMPONENTS OF PERFORMANCE • THE MORE USEFUL MEASURE WOULD BE TO ASSESS THE SOURCES AND COMPONENTS OF PERFORMANCE BY DEVELOPING A MORE REFINED BREAKDOWN. • E. FAMA HAS PROVIDED AN ANALYTICAL FRAMEWORK TO HAVE A MORE DETAILED BREAK DOWN OF THE PERFORMANCE OF THE FUND.

3) COMPONENTS OF PERFORMANCE THIS BREAKDOWN IS DONE IN THE FOLLOWING THREE WAYS :

3) COMPONENTS OF PERFORMANCE THIS BREAKDOWN IS DONE IN THE FOLLOWING THREE WAYS : a) STOCK SELECTION b) MARKET TIMING c) CASH MANAGEMENT ANALYSIS

A) STOCK SELECTION • OVERALL PERFORMANCE OF THE FUND CAN BE EXAMINED IN TERMS

A) STOCK SELECTION • OVERALL PERFORMANCE OF THE FUND CAN BE EXAMINED IN TERMS OF SUPERIOR OR INFERIOR STOCK SELECTION AND THE NORMAL RETURN ASSOCIATED WITH A GIVEN LEVEL OF RISK. TOTAL EXCESS RETURN = SELECTING + RISK • A COMPLETELY DIVERSIFIED PORTFOLIO IS PERFECTLY CORRELATED WITH THE MARKET PORTFOLIO. • CAPITAL MARKET LINE(CML) HELPS IN DETERMINING THE RISK COMMENSURATE WITH THE INCURRED RISK.

B) MARKET TIMING • TO GENERATE SUPERIOR PERFORMANCE BETTER THAN THE MARKET AVERAGE, MARKETS

B) MARKET TIMING • TO GENERATE SUPERIOR PERFORMANCE BETTER THAN THE MARKET AVERAGE, MARKETS HAVE TO BE TIMED CORRECTLY. • MARKET TIMING IMPLIES ASSESSING CORRECTLY THE DIRECTION OF THE MARKET, EITHER BULL OR BEAR AND POSITIONING THE PORTFOLIO ACCORDINGLY. • WHEN THERE IS DECLINING MARKET, CASH PERCENTAGE OF PORTFOLIO SHOULD INCREASE AND VISE-VERSA.

C) CASH MANAGEMENT ANALYSIS • THIS METHOD WAS USED BY FARRELL TO ASSESS THE

C) CASH MANAGEMENT ANALYSIS • THIS METHOD WAS USED BY FARRELL TO ASSESS THE DEGREE TO WHICH VARIATIONS IN THE CASH PERCENTAGE AROUND THE LONG TERM AVERAGE HAVE BENEFIED OR DETRACTED FROM FUND PERFORMANCE. • TWO INDEXES WERE CONSTRUCTED FOR EACH FUND: a) BASED ON THE AVERAGE CASH TO OTHER ASSET ALLOCATION. b) BASED ON QUARTER TO QUARTER CHANGES.

METHODS OF PORTFOLIO PERFORMANCE EVALUATION • SHARPE, TREYNER, JENSEN HAVE DEVELOPED MODELS FOR PORTFOLIO

METHODS OF PORTFOLIO PERFORMANCE EVALUATION • SHARPE, TREYNER, JENSEN HAVE DEVELOPED MODELS FOR PORTFOLIO EVALUATION THAT TAKE INTO CONSIDERATION BOTH RISK AND RETURN OF PORTFOLIOS. 1) SHARPE’S REWARD TO VARIABILITY MODEL 2) TREYNOR’S REWARD TO VOLATILITY MODEL 3) JENSEN’S DIFFERENTIAL RETURN MODEL

1) SHARPE’S REWARD TO VARIABILITY MODEL • THE MODEL YIELDS A SINGLE VALUE THAT

1) SHARPE’S REWARD TO VARIABILITY MODEL • THE MODEL YIELDS A SINGLE VALUE THAT CAN BE USED FOR INVESTMENT PERFORMANCE RANKINGS. • SHARPE’S INDEX = RISK PREMIUM STANDARD DEVIATION • EXAMPLE: PORTFOLIO AVERAGE RETURN STANDARD DEVIATION RISK FREE RATE A 15% 3% 9% B 20% 8% 9%

SA = 15 -9 3=2 SB = 20 -9 9 = 1. 22 PORTFOLIO

SA = 15 -9 3=2 SB = 20 -9 9 = 1. 22 PORTFOLIO ‘A’ IS RANKED HIGHER BECAUSE ITS INDEX i. e. 2. 0 IS HIGHER AS COMPARE TO ‘B’ INDEX i. e. 1. 22.

2) TREYNOR’S REWARD TO VOLATILITY MODEL • IT IS THE MEASURE OF PORTFOLIO’S EXCESS

2) TREYNOR’S REWARD TO VOLATILITY MODEL • IT IS THE MEASURE OF PORTFOLIO’S EXCESS RETURN PER UNIT OF PORTFOLIO’S BETA COEFFICIENTS (b). • TREYNOR’S MEASURE OF PORTFOLIO PERFORMANCE = RETURN OF THE PORTFOLIO – RISK LESS RATE OF RETURN BETA COEFFICIENT VOLATILITY RISK LESS • EXAMPLE: PORTFOLIO RETURN RATE A 20% 5% 8% B 24% 8% 8%

TA = 20 -8 5 = 2. 4 TB = 24 -8 8 =

TA = 20 -8 5 = 2. 4 TB = 24 -8 8 = 2. 0 TREYNOR’S INDEX HAS RANKED PORTFOLIO ‘A’ AS THE BETTER PERFORMER BEACAUSE VALUE IS HIGHER DESPITE THE FACT THAT PORTFOLIO ‘B’ HAS A HIGHER RETURN.

3) JENSEN’S DIFFERENTIAL RETURN MODEL • IT GIVES A MEASURE OF ABSOLUTE PERFORMANCE ON

3) JENSEN’S DIFFERENTIAL RETURN MODEL • IT GIVES A MEASURE OF ABSOLUTE PERFORMANCE ON A RISK ADJUSTED BASIS. • JENSEN’S MODEL : Rt-R = a+b(Rm-R) Rt= PORTFOLIO RETURN R=RISK LESS RETURN a=INTERCEPT THE GRAPH b=BETA COEFFICIENT Rm=RETURN OF MARKET PORTFOLIO

BENCHMARK PORTFOLIOS • A Benchmark portfolio represents the performance evaluation standard. . • Performance

BENCHMARK PORTFOLIOS • A Benchmark portfolio represents the performance evaluation standard. . • Performance evaluation needs to be in relative terms as absolute performance numbers are meaningless. • Benchmark Portfolios is usually a passive index • In practice, portfolios represented by indices such as BSE, NIFTY, etc. are used as benchmarks for portfolio evaluation. • Specialised or customised portfolios can also be constructed in some situations to evaluate portfolios with unique investment style or philosophy.

CHARECTERISTICS OF A VALID BENCHMARK Unambiguous Appropiate Investible Measurable Reflective Specified in advance Awareness

CHARECTERISTICS OF A VALID BENCHMARK Unambiguous Appropiate Investible Measurable Reflective Specified in advance Awareness

TYPES OF BENCHMARKS • ABSOLUTE RETURN BENCHMARK: An absolute return can be taken as

TYPES OF BENCHMARKS • ABSOLUTE RETURN BENCHMARK: An absolute return can be taken as a benchmark. e. g. a minimum return target which the fund manager strives to exceed • MANAGER UNIVERSES: A Median manager or fund from a board universe of managers or funds can be used as a performance evaluation benchmark by the fund sponsors.

TYPES OF BENCHMARKS…. . • BROAD MARKET INDEX: Market indexes like NIFTY, BSE, are

TYPES OF BENCHMARKS…. . • BROAD MARKET INDEX: Market indexes like NIFTY, BSE, are well recognized, easy to understand, widely available and satisfy several properties of valid benchmarks. These can be accepted as the perfect benchmarks in situations like; -Asset category performance and -Core type investment approaches in which the managers select from a universe of securities similar in composition to the benchmark. • CUSTOM SECURITY BASED: • This benchmark reflects a manager’s weighing approach. This is simply a manager. s search universe weighted in a particular fashion.

CONSTRUCTION OF CUSTOM SECURITY BASED BENCHMARKS Identification of the prominent aspects of fund manager’s

CONSTRUCTION OF CUSTOM SECURITY BASED BENCHMARKS Identification of the prominent aspects of fund manager’s investment process Rebalancing the benchmark portfolio on a predetermined schedule. Selection of securities consistent with the investment process Devising a weightage scheme for the benchmark securities Review of the preliminary benchmark and making the modifications

APPLICATION OF EVALUATION TECHNIQUES 1. DEGREE OF RISK ASSUMED: §Is the portfolio underdiversified, overdiversified

APPLICATION OF EVALUATION TECHNIQUES 1. DEGREE OF RISK ASSUMED: §Is the portfolio underdiversified, overdiversified or properly diversified? §Does the investor use margin? §If yes, is it too much? 2. SELECTION OF INDIVIDUAL SECURITIES: §Does the investor has the ability to select undervalued securities? §Does the % gain of the weekly purchased §Has the buyer made good selections regularly?

3. CYCLICAL AND MARKET TRi. NNG: 4. RISK ADJUSTED RETURN: §Can the investor anticipate

3. CYCLICAL AND MARKET TRi. NNG: 4. RISK ADJUSTED RETURN: §Can the investor anticipate the market savings? Has the investr compared the risk adjusted returns with those e. Xperienced by market index<the a. Verage stock funds and mutual funds etc §Can he adjust his portfolio into aggressive, neutral or detensive postions on the basis of the first point? Has the e. Valu. Ation been done o. Ver different market segments before rea. Ching the final judgement? §Has the investor been successful inadjusting his portfolio? §What are the basis of his anticipation of market savings? §What improvements can be made? Has the evaluation been done consistently at least once every year? Can the evaluation provide m. EASURE to improve overall ability of fund managers?

REVIEW AND MONITORING OF PORTFOLIO Portfolio monitoring is the Continuous ongoing assessment of the

REVIEW AND MONITORING OF PORTFOLIO Portfolio monitoring is the Continuous ongoing assessment of the current portfolio and upgrading or Changes in asset Composition to take advantage of -changes in market conditions -changes in e. Conomi. C Performance - Changes in goeals objectives and performances The Monitoring requires continuous feedback from the in. Vestors as to the changes in the Conditions re. View of the in. Vestment poliy relati. Ve to investors preferences

THANK YOU

THANK YOU