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Portfolio Performance Measurement and Benchmarking | Publisher: McGraw-Hill; 1 edition (May 15, 2009)| ISBN: 0071496653 | 480 pages | PDF |

In order to make sound investment choices, investors must know the projected return on investment in relation to the risk of not being paid. Benchmarks are excellent evaluators, but the failure to choose the right investing performance benchmark often leads to bad decisions or inaction, which inevitably results in lost profits.

The first book of its kind, Portfolio Performance Measurement and Benchmarking is a complete guide to benchmarks and performace evaluation using benchmarks. In one inclusive volume, readers get foundational coverage on benchmark construction, as well as expert insight into specific benchmarks for asset classes and investment styles.

Starting with the basics—such as return calculations and methods of dealing with cash flows—this thorough book covers a wide variety of performance measurement methodologies and evaluation techniques before moving into more technical material that deconstructs both the creation of indexes and the components of a desirable benchmark.

Portfolio Performance Measurement and Benchmarking provides detailed coverage of benchmarks for:

* U.S. equities
* Global and international equities
* Fixed income
* Real estate

The team of renowned authors offers illuminating opinions on the philosophy and development of equity indexes, while highlighting numerous mechanical problems inherent in building benchmarks and the implications of each one. Before you make your next investment, be certain your return will be worth the risk with Portfolio Performance Measurement and Benchmarking.


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From the Back Cover
The first comprehensive guide to performance assessment and equity benchmark construction for your portfolio

Portfolio Performance Measurement and Benchmarking helps institutional investors create a smart system for accurate performance evaluation of managed asset portfolios. Striking a useful balance between scholarly groundwork and real-world practicality, this state-of-the-art book gives readers a potent combination of cornerstone knowledge on measuring return and risk with practical guidance on evaluating the performance of a variety of investment strategies.

Packed with applicable examples demonstrating how to correctly calculate performance statistics and properly interpret the results, Portfolio Performance Measurement and Benchmarking features:

* Thorough coverage of a wide variety of performance-measurement methodologies and evaluation techniques
* Expert explanations of the mathematics underlying each method
* Specific calculation and evaluation examples from the real world

From the basics of asset class return expectations and portfolio comparisons to up-to-date information on investment styles and global index construction, this go-to guide provides a useful depth of coverage in easy-to-understand terms.

Whether you’re investing in a single equity market or managing a multiple asset class fund, Portfolio Performance Measurement and Benchmarking is a must-have resource for determining which investment strategies offer the most profitable rewards relative to their risk.

Table of Contents
Preface xi
Chapter 1 What Is Performance and Benchmarking? 1 The Basic Issue: Has Your Wealth Increased? 1 Was the Change in Wealth Worth the Risk? 2 Comparing Return with Alternative Investment Returns 3 Active Investing versus Passive Investing 4
Performance Attribution 5 Chapter 2 Asset Class Return Expectations 7 The Expected Range of Returns from Different Kinds of Investments 7 What Range of Values Is Likely to Be Encountered? 8 Chapter 3 Returns Without Cash Flows 13 Portfolio Market Value 13 Holding Period Return 14 Linking Returns 15 Rule of 72 17 Chapter 4 Average Returns 19 Average Return Per Period 19 Annualized Return 21 Compounding Frequency 22 Expected Return 24 Chapter 5 Returns in the Presence of Cash Flows 27 Cash Flows 27 Unit Value Method 28 Time-Weighted Return 30 Linked Internal Rate of Return 33
The Dietz Method 36 Subportfolio Returns and Consistency 38 Time-Weighted versus Money-Weighted Returns 40 Chapter 6 Comparing Two Portfolio Returns 47 Excess Returns Over a Benchmark-Past Performance 48 Compound Excess Return 51 Situations Where the Arithmetic Excess Return Is the Appropriate Choice 53 Recommended Practice 55 Chapter 7 Some Foundations 57 The Risk-Free Rate 57 Market Equilibrium 59 The CAPM of Sharpe, Lintner, and Mossin 60 Arbitrage Pricing Theory (APT) and Other Asset Pricing Models 65 Chapter 8 Estimating the Elements of the CAPM 67 The CAPM with Constant Alpha and Beta Over Time 67 Problems with the Use of Inappropriate Benchmarks 69 Other Estimation Problems 71 Chapter 9 What Is Risk 79
Types of Risk 79 A Basic Measure of Risk as Volatility in Returns81
Measuring Bad Variation 84 Covariance 88 Tracking Error and Residual Risk 90
Chapter 10 Risk-Adjusted Return Measures 93 Sharpe Ratio 94 Sortino Ratio 96
Modigliani-Modigliani Measure 97 Jensen's Alpha 99 Treynor's Measure 100
Appraisal Ratio and Information Ratio 101 Comparing the Risk-Adjusted Measures 102
Chapter 11 Fixed-Income Risk 105 Duration: Macaulay, Modified, and Effective Duration 107 Convexity 111 Prepayment Risk for Mortgages and Callables 113 Issuer-specific Risk, Default Risk, and Correlated Default Risk 114 Chapter 12 Conditional Performance Evaluation 117 Models for Performance Measurement 119 Logic of Conditional Performance Evaluation 119 Unconditional Alphas and Betas 121 Time-Varying Conditional Betas 122 Time-Varying Conditional Alphas 123 Benchmark Portfolios 125 Implications for Investors 126 Chapter 13 Market Timing 127
Merton-Henriksson Market Timing Model 127 Treynor-Mazuy Model 129 Up-Down Market Model: Up Market versus Down Market Beta 133 The Problem of Non-Timing-Related Nonlinearities 133 Chapter 14 Factor Models 137 The Single Index Model 137
Multiple Factor Models 138 Factor Model Analytics 140 A Simple Example 141
Chapter 15 Factors of Equity Returns in the United States 147 Various Factor Model Factors 147 The Barra Factors 150 Factor-Mimicking Portfolios: High-Low Approach and Factor Extraction Approach 154 Chapter 16 Factor Model (Barra) Performance Attribution 157 Attribution "Executive Summary" 158
Total Annualized Attribution Chart 160 Annual Attribution Report 162 Annualized Contributions to Risk Indexes 164 Industries: Top-10 and Bottom-10 Contributors to Active Return 166 Asset Selection: Annualized Attribution 169 Chapter 17 Contributions to Return 171 Chapter 18 Performance Attribution 177 Sector-Based Attribution Framework 178 Single-Period Arithmetic Sector-Based Attribution 182 Chapter 19 Linking Attribution Effects 191 Multiperiod Contributions to Return 192 Excess Return Recursion 197 An Idealized Attribution System 199 Logarithmic Linking Coefficients 202 A Link to Recursive Methods 204 Other Methods 205 Example 207 Other Topics 210 Notes 212 References 213 Chapter 20 Benchmarks and Knowledge 215
Peer Universes 216 Passive Market Indexes 221 Manager-Specific Stock-Matching Benchmark: Normal Portfolios 223 For What Should a Manager Be Given Credit? 228 Chapter 21 Elements of a Desirable Benchmark 231 Origins of U.S. Equity Benchmarks 231 The Fundamental Meaning and Purposes of a Financial Index 233 Where You Stand on the "Best" Indexes Depends on Where You Sit 235 The Best Index Is Based on Four Principles of Useful Indexes 238 Desirability Trade-Offs 241 Issues with Index Construction 243 The Paradox of Asset Management 245 Chapter 22 Index Weighting 247
Advantages and Disadvantages of Capitalization Weighting 248 Portfolio Equity Characteristics: Capitalization Weighting versus Equal Weighting 251 Challenges to Capitalization Weighting 253 Chapter 23 Practical Issues with Building Indexes 259
Index Calculations 259 Decisions That Have to Be Made by the Index Creator 264
Russell U.S. Equity Index Construction 266 Chapter 24 Styles, Factors, and Equity Benchmarks 275 Defining Equity Style 275 Types of Equity Styles 278 Evidence of Styles 284 Historical Perspective on Styles 286 CAPM, Factor Models, and the Behavior of Styles 287 Which Equity Style Is Best? 288 Chapter 25 Equity Style Indexes: Tools for Better Performance Evaluation and Plan Management 293
Introduction 293 Style Definitions 294 Performance Evaluation and Styles 296
Style Index Construction 299 Validation of Style Indexes 302 Uses of the Style Indexes 308 Conclusion 311 Chapter 26 Russell Style Index Methodology 313
Style Index Algorithm 314 Rationale for Key Features 320 Chapter 27 U.S. Equity Benchmarks 325 S&P and S&P/Citigroup Family of Indexes 326 Dow Jones Indexes 328
Russell Indexes 329 MSCI Family of Indexes 331 CRSP Composite and Decile Indexes 333
Other Indexes: NYSE and NASDAQ Indexes 334 Comparing Index Construction Issues 335
Index Comparisons 340 Conclusion 346 Chapter 28 Global and International Equity Benchmarks 347 Global versus International 347 MSCI Index Family 350
Dow Jones Global Indexes 353 S&P/Citigroup Global Indexes 354 FTSE Index Family 357
Russell/Nomura Indexes 359 Russell Global Indexes 363 Conclusion 371 Chapter 29 Fixed-Income Benchmarks 373 Fixed-Income Benchmark Construction Difficulties 373 Barclays Capital Family of Global Fixed-Income Indexes 377 Merrill Lynch Fixed-Income Index Family 383 J.P. Morgan Family of Fixed-Income Indexes 385
Chapter 30 Real Estate Benchmarks 387 Real Estate Index Construction Issues 388
Private Real Estate Indexes 400 Publicly Traded Real Estate Security Indexes 403
Chapter 31 Hedge Fund Universes 409 Hedge Funds as Absolute Return Strategies 409
Hedge Fund Indexes 412 Building a Good Hedge Fund Index 412 Inherent Problems with Universes of Hedge Funds 414 Available Hedge Fund Indexes 416 Chapter 32 Determining Investment Style 421 Approaches to the Style Classification Problem 422 Effective Mix: A Returns-Based Methodology 426 Effective Mix Limitations and Maximizing Usefulness 433 Conclusion 448 Chapter 33 GIPS: Global Investment Performance Standards 449 The Reason for GIPS 449 Overview of GIPS 451 Index 453


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