BS ACCOUNTING & FINANCE

SUBMITTED TO:
DR SOHAIL SAEED

SUBMITTED BY:
GROUP 4
ASAD ULLAH
M ZEESHAN
SYED ZIA
M ANS
 PORTFOLIO EVOLUTION
Portfolio performance evaluation is an essential aspect of the investment process
that allows investors and portfolio managers to assess the effectiveness of their
investment strategies.
The main goal of performance evaluation is to determine whether the
chosen investment strategy is achieving the desired risk and return objectives.
Components of Portfolio Performance Evaluation

• Risk Assessment
A crucial part of evaluating portfolio performance is assessing the level of
risk taken by the investor. This can be done by examining the volatility of the
portfolio, measured by the standard deviation or other risk metrics, as well
as the correlation of the portfolio's returns with the broader market.
• Return Assessment
Return assessment involves analyzing the returns generated by the portfolio
over a specific period. This can include measures such as absolute returns,
relative returns compared to a benchmark, or even risk-adjusted returns that
take into account the level of risk taken to achieve the given returns.
• Risk-Adjusted Performance
Risk-adjusted performance metrics allow investors to evaluate the effectiveness of a
portfolio by considering both the returns generated and the level of risk taken to
achieve those returns.
This is important as it helps determine whether a portfolio is generating sufficient
returns for the level of risk taken.
• Attribution Analysis
Attribution analysis seeks to identify the sources of a portfolio's performance, such as
sector allocation, security selection, and interaction effects. This information can help
investors and portfolio managers make more informed decisions about
their investment strategies.
• Benchmark Comparison
Comparing a portfolio's performance to a relevant benchmark is a common practice
in performance evaluation.
This allows investors to determine whether the portfolio is outperforming or
underperforming the market or its peers, providing valuable insight into the
effectiveness of the investment strategy.
 Key Performance Metrics

Absolute Return Measures

Total Return
Total return is a measure of the total gain or loss of a portfolio over a specific
period, expressed as a percentage of the initial investment. It includes
both capital gains and any income generated, such as dividends or interest.
Compound Annual Growth Rate (CAGR)
CAGR is a measure of the average annual growth rate of a portfolio over a
specific period. It is a useful metric for comparing the performance of
different investments, as it smooths out the effects of short-term
fluctuations and provides a standardized measure of growth.
Risk-Adjusted Return Measures
 Sharpe Ratio
The Sharpe ratio measures the excess return per unit of risk taken by a portfolio. A higher
Sharpe ratio indicates a better risk-adjusted performance, as it shows that the portfolio is
generating higher returns for each unit of risk taken.
 Sortino Ratio
The Sortino ratio is similar to the Sharpe ratio but focuses only on downside risk or the risk of
negative returns. This makes it a more appropriate measure for investors who are particularly
concerned about the potential for losses.
 Trey nor Ratio
The Trey nor ratio measures the excess return per unit of systematic risk taken by a portfolio,
as measured by its beta. A higher Trey nor ratio indicates that a portfolio is generating higher
returns for each unit of market risk taken.
 Jensen's Alpha
Jensen's alpha measures the excess return of a portfolio above what would be expected given
its level of market risk, as measured by its beta. A positive Jensen's alpha indicates that a
portfolio is outperforming its expected return, while a negative alpha indicates
underperformance.
Performance Attribution
Sector Allocation
Sector allocation refers to the impact of a portfolio's allocation to different
sectors on its performance. By analyzing this factor, investors can determine
whether their investment decisions in certain sectors contributed positively or
negatively to the overall performance.
Security Selection
Security selection refers to the impact of individual security selection within a
sector on a portfolio's performance. Analyzing this factor allows investors to
determine if their choices of specific securities contributed positively or
negatively to the overall performance.
Interaction Effect
The interaction effect is the combined impact of sector allocation and security
selection on portfolio performance. Understanding this effect can help
investors identify whether their investment decisions resulted in a synergy that
enhanced overall performance.
 Tools and Techniques for Portfolio Performance Evaluation

Software and Platforms

Numerous software and platforms are available to assist investors and portfolio
managers in evaluating portfolio performance. These tools can help automate the
process, provide advanced analytics, and generate detailed reports.
Portfolio Analytics
Portfolio analytics involves using various quantitative techniques to analyze the risk
and return characteristics of a portfolio. These techniques can include optimization,
stress testing, and scenario analysis, among others.
Reporting and Visualization
Effective reporting and visualization can help investors and portfolio managers better
understand and communicate their portfolio's performance. Tools such as charts,
graphs, and tables can help illustrate complex data in a more digestible format.
 Roles of Performance Evaluation in Investment Decisions

Identifying Strengths and Weaknesses

Performance evaluation can help investors identify the strengths and weaknesses of
their investment strategies. This information can be used to make adjustments to
improve performance or reduce risk.
Improving Investment Strategy
Regular performance evaluations can help investors and portfolio managers refine
their investment strategies by identifying areas that require improvement or
adjustment based on market conditions and individual objectives.
Monitoring Manager Performance
For investors who use professional portfolio managers, performance evaluations can
be an essential tool for monitoring the manager's effectiveness and ensuring that
they are adhering to the agreed-upon investment strategy.
 Conclusion

Portfolio performance evaluation is a critical aspect of the investment process that helps
investors and portfolio managers make informed decisions and optimize their strategies.
By assessing risk, return, and risk-adjusted performance, investors can identify the strengths and
weaknesses of their investment approaches and make necessary adjustments.
Regular evaluations also help investors monitor their portfolio managers' performance and
maintain confidence in their investment decisions.
Incorporating a wide range of performance metrics, appropriate benchmarks, and advanced
tools can provide a more accurate and comprehensive evaluation.
However, it is essential to consider practical factors such as data accuracy, evaluation frequency,
and the impact of fees and taxes to ensure a true representation of a portfolio's performance.
As markets and investment objectives evolve, performance evaluation methodologies must
adapt to provide meaningful insights. Ultimately, regular and thorough portfolio performance
evaluations can lead to better investment decisions and improved investor confidence and trust.