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Preface | |
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What Is Performance and Benchmarking? | |
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The Basic Issue: Has Your Wealth Increased? | |
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Was the Change in Wealth Worth the Risk? | |
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Comparing Return with Alternative Investment Returns | |
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Active Investing versus Passive Investing | |
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Performance Attribution | |
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Asset Class Return Expectations | |
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The Expected Range of Returns from Different Kinds of Investments | |
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What Range of Values Is Likely to Be Encountered? | |
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Returns Without Cash Flows | |
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Portfolio Market Value | |
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Holding Period Return | |
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Linking Returns | |
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Rule of 72 | |
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Average Returns | |
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Average Return Per Period | |
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Annualized Return | |
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Compounding Frequency | |
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Expected Return | |
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Returns in the Presence of Cash Flows | |
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Cash Flows | |
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Unit Value Method | |
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Time-Weighted Return | |
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Linked Internal Rate of Return | |
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The Dietz Method | |
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Subportfolio Returns and Consistency | |
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Time-Weighted versus Money-Weighted Returns | |
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Comparing Two Portfolio Returns | |
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Excess Returns Over a Benchmark-Past Performance | |
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Compound Excess Return | |
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Situations Where the Arithmetic Excess Return Is the Appropriate Choice | |
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Recommended Practice | |
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Some Foundations | |
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The Risk-Free Rate | |
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Market Equilibrium | |
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The CAPM of Sharpe, Lintner, and Mossin | |
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Arbitrage Pricing Theory (APT) and Other Asset Pricing Models | |
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Estimating the Elements of the CAPM | |
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The CAPM with Constant Alpha and Beta Over Time | |
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Problems with the Use of Inappropriate Benchmarks | |
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Other Estimation Problems | |
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What Is Risk | |
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Types of Risk | |
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A Basic Measure of Risk as Volatility in Returns | |
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Measuring Bad Variation | |
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Covariance | |
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Tracking Error and Residual Risk | |
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Risk-Adjusted Return Measures | |
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Sharpe Ratio | |
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Sortino Ratio | |
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Modigliani-Modigliani Measure | |
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Jensen's Alpha | |
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Treynor's Measure | |
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Appraisal Ratio and Information Ratio | |
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Comparing the Risk-Adjusted Measures | |
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Fixed-Income Risk | |
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Duration: Macaulay, Modified, and Effective Duration | |
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Convexity | |
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Prepayment Risk for Mortgages and Callables | |
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Issuer-specific Risk, Default Risk, and Correlated Default Risk | |
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Conditional Performance Evaluation | |
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Models for Performance Measurement | |
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Logic of Conditional Performance Evaluation | |
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Unconditional Alphas and Betas | |
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Time-Varying Conditional Betas | |
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Time-Varying Conditional Alphas | |
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Benchmark Portfolios | |
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Implications for Investors | |
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Market Timing | |
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Merton-Henriksson Market Timing Model | |
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Treynor-Mazuy Model | |
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Up-Down Market Model: Up Market versus Down Market Beta | |
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The Problem of Non-Timing-Related Nonlinearities | |
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Factor Models | |
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The Single Index Model | |
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Multiple Factor Models | |
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Factor Model Analytics | |
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A Simple Example | |
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Factors of Equity Returns in the United States | |
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Various Factor Model Factors | |
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The Barra Factors | |
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Factor-Mimicking Portfolios: High-Low Approach and Factor Extraction Approach | |
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Factor Model (Barra) Performance Attribution | |
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Attribution "Executive Summary" | |
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Total Annualized Attribution Chart | |
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Annual Attribution Report | |
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Annualized Contributions to Risk Indexes | |
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Industries: Top-10 and Bottom-10 Contributors to Active Return | |
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Asset Selection: Annualized Attribution | |
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Contributions to Return | |
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Performance Attribution | |
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Sector-Based Attribution Framework | |
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Single-Period Arithmetic Sector-Based Attribution | |
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Linking Attribution Effects | |
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Multiperiod Contributions to Return | |
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Excess Return Recursion | |
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An Idealized Attribution System | |
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Logarithmic Linking Coefficients | |
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A Link to Recursive Methods | |
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Other Methods | |
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Example | |
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Other Topics | |
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Notes | |
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References | |
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Benchmarks and Knowledge | |
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Peer Universes | |
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Passive Market Indexes | |
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Manager-Specific Stock-Matching Benchmark: Normal Portfolios | |
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For What Should a Manager Be Given Credit? | |
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Elements of a Desirable Benchmark | |
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Origins of U.S. Equity Benchmarks | |
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The Fundamental Meaning and Purposes of a Financial Index | |
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Where You Stand on the "Best" Indexes Depends on Where You Sit | |
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The Best Index Is Based on Four Principles of Useful Indexes | |
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Desirability Trade-Offs | |
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Issues with Index Construction | |
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The Paradox of Asset Management | |
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Index Weighting | |
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Advantages and Disadvantages of Capitalization Weighting | |
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Portfolio Equity Characteristics: Capitalization Weighting versus Equal Weighting | |
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Challenges to Capitalization Weighting | |
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Practical Issues with Building Indexes | |
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Index Calculations | |
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Decisions That Have to Be Made by the Index Creator | |
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Russell U.S. Equity Index Construction | |
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Styles, Factors, and Equity Benchmarks | |
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Defining Equity Style | |
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Types of Equity Styles | |
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Evidence of Styles | |
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Historical Perspective on Styles | |
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CAPM, Factor Models, and the Behavior of Styles | |
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Which Equity Style Is Best? | |
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Equity Style Indexes: Tools for Better Performance Evaluation and Plan Management | |
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Introduction | |
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Style Definitions | |
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Performance Evaluation and Styles | |
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Style Index Construction | |
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Validation of Style Indexes | |
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Uses of the Style Indexes | |
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Conclusion | |
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Russell Style Index Methodology | |
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Style Index Algorithm | |
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Rationale for Key Features | |
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U.S. Equity Benchmarks | |
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S&P and S&P/Citigroup Family of Indexes | |
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Dow Jones Indexes | |
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Russell Indexes | |
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MSCI Family of Indexes | |
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CRSP Composite and Decile Indexes | |
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Other Indexes: NYSE and NASDAQ Indexes | |
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Comparing Index Construction Issues | |
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Index Comparisons | |
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Conclusion | |
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Global and International Equity Benchmarks | |
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Global versus International | |
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MSCI Index Family | |
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Dow Jones Global Indexes | |
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S&P/Citigroup Global Indexes | |
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FTSE Index Family | |
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Russell/Nomura Indexes | |
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Russell Global Indexes | |
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Conclusion | |
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Fixed-Income Benchmarks | |
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Fixed-Income Benchmark Construction Difficulties | |
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Barclays Capital Family of Global Fixed-Income Indexes | |
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Merrill Lynch Fixed-Income Index Family | |
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J.P. Morgan Family of Fixed-Income Indexes | |
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Real Estate Benchmarks | |
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Real Estate Index Construction Issues | |
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Private Real Estate Indexes | |
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Publicly Traded Real Estate Security Indexes | |
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Hedge Fund Universes | |
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Hedge Funds as Absolute Return Strategies | |
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Hedge Fund Indexes | |
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Building a Good Hedge Fund Index | |
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Inherent Problems with Universes of Hedge Funds | |
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Available Hedge Fund Indexes | |
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Determining Investment Style | |
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Approaches to the Style Classification Problem | |
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Effective Mix: A Returns-Based Methodology | |
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Effective Mix Limitations and Maximizing Usefulness | |
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Conclusion | |
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GIPS: Global Investment Performance Standards | |
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The Reason for GIPS | |
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Overview of GIPS | |
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Index | |