Investments, tenth edition

LEGEND:

Given data

Value calculated

See comment

In 10/11, investor withdraws all of

security S2 from the account at the

current price.

2

1

3

4

5

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9

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11

12

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17

A

B

D

C

E

F

G

H

I

J

 eXcel APPLICATIONS:    Simple Investment Account 

  A

 n investment account starts with an initial contribution 

of $10,000 dollars. Over a time period of 2 years, the 

account experiences both inflows and outflows of cash in 

the form of additional contributions, withdrawals, and 

dividends (not reinvested). Using Excel’s XIRR function, this 

spreadsheet shows the dollar-weighted average return of 

the account.    

  Excel Questions 

    1.  What would happen to the rate of return if, instead of with-

drawing security S2 in October, the investor holds onto it? 

Explain the difference in returns.  

   2.  How much would the investor need to contribute to the 

account in 03/12 to bring the dollar-weighted average 

return up to a value of zero?     

  

3

 In previous chapters (particularly in Chapter 11 on the efficient market hypothesis), we have examined whether 

actively managed portfolios can outperform a passive index. For this purpose we looked at the distribution of 

alpha values for samples of mutual funds. We noted that any conclusion from such samples was subject to error 

due to survivorship bias if funds that failed during the sample period were excluded from the sample. In this 

chapter, we are interested in how to assess the performance of individual funds (or other portfolios) of interest. 

When a particular portfolio is chosen today for inspection of its returns going forward, survivorship bias is not 

an issue. However, comparison groups must be free of survivorship bias. A sample comprised only of surviving 

funds will bias the return of the benchmark group upward and the  relative  performance of any particular fund 

downward. 

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Final PDF to printer

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portfolio characteristics are not truly compa-

rable. For example, within the equity universe, 

one manager may concentrate on high-beta or 

aggressive growth stocks. Similarly, within 

fixed-income universes, durations can vary 

across managers. These considerations suggest 

that a more precise means for risk adjustment 

is desirable. 

 Methods of risk-adjusted performance evalu-

ation using mean-variance criteria came on 

stage simultaneously with the capital asset 

pricing model. Jack Treynor,  

4

    William  Sharpe,  

5

   

and Michael Jensen 

 

6

    recognized  immediately 

the implications of the CAPM for rating the 

performance of managers. Within a short time, 

academicians were in command of a battery of 

performance measures, and a bounty of schol-

arly investigation of mutual fund performance 

was pouring from ivory towers. Shortly thereaf-

ter, agents emerged who were willing to supply 

rating services to portfolio managers and their 

clients.