Download How to calculate Portfolio Performance

How to calculate Portfolio
Performance
By – Yogesh Sane
Why Measure Performance?
• You can’t manage what you can’t measure.
• Are your efforts paying off?
• What can you expect as future returns?
Information Required
•
•
•
•
Monthly/Quarterly/Annual Holding Statement(s).
Monthly/Quarterly/Annual Cash Statement for your broker account(s).
Amount and date of all net cashflows.
Portfolio Value on all Cashflow dates (only for Time-Weighted
Return).
• Transactions are not needed.
Date
Cashflow
15-Nov-15 100,000
31-Dec-15
0
24-Feb-16 50,000
21-Oct-16 (50,000)
31-Dec-16
0
10-Mar-17
(527)
Portfolio Value After
Cashflow
100,000
105,624
141,562
125,497
119,546
130,847
Comments
Trading account opened with 100000
Holding Statement for Dec 2015
Cash Deposit 50000
Cash withdrawal 50,000
Holding Statement for Dec 2016
Cash Dividend Received
Time-Weighted Vs Money-Weighted Returns
Time Weighted Returns
Money Weighted Returns
Calculated by geometric linking of holding
period returns between cashflow dates over the
calculation period.
Rate of return that will set the present values of
all cash flows and terminal values equal to the
value of the initial investment.
Not impacted by timing and size of cashflows.
Accurately reflects timing and size of
cashflows and amount invested.
Indicates the return generated by investment
strategy.
Indicates returns actually earned by the
investor.
Reflects the stock selection and portfolio
construction skills
Reflects the market timing skills
Appropriate measure for comparison between
strategies or managers.
Can be significantly different from TWR in
case of substantial cashflows in the portfolio.
Requires portfolio valuation on all cashflow
dates and beginning and ending dates.
Requires portfolio valuation only at the
beginning and ending dates.
Generally easy to calculate using simple
arithmetic.
Requires computer algorithms that use
quadratic programming (Excel).
Additional Performance Metrics
Metric
Formula
Description
Risk
Standard Deviation of
periodic returns
Measures the ups and downs in your
portfolio. How bumpy is your portfolio?
Alpha
Portfolio returns minus
benchmark returns.
Excess returns over benchmark. Are you
beating your benchmark?
Beta
Covariance of portfolio
Measures zig-zag of your portfolio relative
returns and benchmark
to benchmark. Are you riding the waves in
returns divided by variance of the market or swimming against the current?
benchmark returns
Sharpe
Ratio
Excess return over risk free
rate divided by standard
deviation of portfolio returns.
Measures risk adjusted return. Are you a
good investor or just a good equity investor?
Information
Ratio
Average of alpha returns
divided by Standard
Deviation of alpha returns.
Are you a skilled investor or just got lucky?
Are you generating consistently good
performance or a one-trick pony?