To add in the middle of page 331 of the book Fama's Performance Measure - Decomposition of Return All assets should

provide returns commensurate with the risk free rate and the risk. So far we studied ranking of mutual funds with respect to total risk (Sharpe) and systematic risk (Treynor) and performance compared to required return using CAP (!ensen). The analysis "y #ama provides a detailed "reakup of returns into risk free return$ reward for systematic risk$ reward for unsystematic risk as compared to the market and remainder due to net stock selectivity. The return due to stock selectivity$ positive or negative$ can "e used to %udge the performance of the fund manager in terms of return for "earing the risk for diversification which was different from the market portfolio. &f positive investors have "enefited from the stocks selected "y the fund manager. 'p ( 'f )'sys)'unsys)'sel 'sys ( reward for systematic risk ( p ('m*'f) 'unsys (reward for unsystematic risk ( +(p , m ) * p - . ( 'm / 'f) 'sel(reward from selectivity ( 'p* ('f) 'sys) 'usys) ( ('p* 'f)* p ('m*'f) * +(p , m ) * p-.( 'm / 'f)( ('p* 'f)* +(p , m ).( 'm / 'f) &t may help to view these rewards in terms of what has "een discussed earlier / (0) reward for total risk as in the capital market line used to derive CAP 1 (2) reward for systematic risk as in the security market line in CAP 1 and reward for unsystematic risk ( reward for total risk*reward for systematic risk i.e. (0)*(2). Also %ust as we had !ensen3s alpha which helped us identify whether the portfolio had done "etter or worse than required "y the CAP $ we have #ama3s reward from selectivity which measures whether the return is more or less as required "y the capital market line. 4e take the same data as e5ample 06.0 on page 778 to illustrate this concept
Fama's Performance Measure Reward for Reward for Beta systematic risk unsystematic risk ,-Rm&Rf. (,/m &,.0-Rm&Rf. 1."# 1 .$ %.15 #.!' 5.5% 5.55 #.55 %."5 ".'" 1.## !.## ).$! 1.#5 !.%5 %.15

Portfolio A B ( D * Market +&Bills

Return 15 % 1$ # 1% $

Std. Dev ! 1' # 1" 1

Reward from selectivity R,&Rf&-,/m.0-Rm&Rf. &$.!5 5.' & ."% .%% 5.5#

Portfolios 9$: and ; have positive rewards from selectivity1 the managers selected stocks that gave higher return than the required return for systematic and unsystematic risk. <n the other hand portfolios A and C had negative rewards from selectivity.