Investments, tenth edition

Non-

Average

Beta

systematic Sharpe's

Treynor's

Jensen's

M2

T2

Appraisal

Fund

Return

Deviation Coefficient

Risk

Measure

Measure

Measure

Measure

Measure

Ratio

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Ranking By Sharpe's Measure

Performance Measurement

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P A R T   V I I

  Applied Portfolio Management

  Actual Performance Measurement: An Example 

 Now that we have examined possible criteria for performance evaluation, we need to deal 

with a statistical issue: Can we assess the quality of ex ante decisions using ex post data? 

Before we plunge into a discussion of this problem, let us look at the rate of return on 

Jane’s portfolio over the last 12 months.  Table 24.2  shows the excess return recorded each 

month for Jane’s portfolio  P,  one of her alternative portfolios  Q,  and the benchmark index 

portfolio  M.  The last rows in  Table 24.2  give sample average and standard deviations. From 

these, and regressions of  P  and  Q  on  M,  we obtain the necessary performance statistics.  

 The performance statistics in  Table 24.3  show that portfolio  Q  is more aggressive than  P,

in the sense that its beta is significantly higher (1.40 vs. .70). At the same time, from its 

residual standard deviation,  P  is better diversified (2.02% vs. 9.81%). Both portfolios out-

performed the benchmark market index, as is evident from their larger Sharpe ratios (and 

thus positive  M  

2

 ), their positive alphas, and better Morningstar RAR.