Portfolio Performance Measurement and Benchmarking

ISBN-10: 0071496653
ISBN-13: 9780071496650
Edition: 2009
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Book details

Copyright year: 2009
Publisher: McGraw-Hill Professional Publishing
Publication date: 7/1/2009
Binding: Hardcover
Pages: 480
Size: 6.00" wide x 9.00" long x 1.50" tall
Weight: 1.738
Language: English

Jon A. Christopherson, Ph.D., is a research fellow for Russell Investments, where he has a solid record of intellectual innovation. He has been a member of the editorial advisory boards of The Journal of Portfolio Management and The Journal of Investment Consulting. David R. Cari�o, Ph.D., is a research fellow for Russell Investments. He was the architect of the Russell-Yasuda Kasai model, which received a Franz Edelman Award by The Institute of Operational Research and the Management Sciences. Cari�o serves on the advisory board of The Journal of Performance Measurement. Wayne E. Ferson, Ph.D., holds the Ivadelle and Theodore Johnson Chair in Banking and Finance at the USC Marshall School of Business and is the former John L. Collins Chair in Finance at the Carroll School of Management at Boston College. He is widely known in academic circles, has been published in the best academic journals, and has served on several prestigious editorial boards.

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

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