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Portfolio Performance Measures

In: Professional Investment Portfolio Management

Author

Listed:
  • James W. Kolari

    (Texas A&M University)

  • Wei Liu

    (Texas A&M University)

  • Seppo Pynnönen

    (University of Vaasa)

Abstract

The true market portfolio of the CAPM on the efficient frontier (located at the tangent point of the line extending from the riskless rate) is not observable in the real world. Sharpe received the Nobel Prize in Economics for developing the CAPM and proposed that portfolio performance can be compared by computing their excess returns divided by the standard deviation of returns (or total risk). This so-called Sharpe ratio is one of the most widely used measures of portfolio efficiency. However, it does not take into account beta risk in the CAPM. In this regard, Gibbons et al. (Econometrica 57:1121–1152, 1989) (GRS) proposed a test of whether any particular portfolio is ex ante mean-variance efficient in the context of the market model version of the CAPM. More specifically, they modified the Hotelling $$T^2$$ T 2 test to take into account whether a portfolio lies on the efficient frontierEfficient frontier. While the Sharpe ratio and GRS test are prominent in academic studies on portfolio performance, practitioners have developed other metrics to evaluate portfolio performance. One such popular measure is drawdowns, which is tantamount to value at risk (VaR). If a portfolio exhibits high periodic drawdowns, it is necessary to carefully evaluate the potential gains in the long run that may serve to counterbalance this risk.

Suggested Citation

  • James W. Kolari & Wei Liu & Seppo Pynnönen, 2023. "Portfolio Performance Measures," Springer Books, in: Professional Investment Portfolio Management, chapter 0, pages 97-119, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-48169-7_6
    DOI: 10.1007/978-3-031-48169-7_6
    as

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