If you own funds managed by other is it is a good idea to have a basic understanding of how to evaluate portfolios.

Evaluating a portfolio consists of three parts :

1. Performance Measurement

2. Performance Attribution

3. Performance Appraisal

Performance Measurement

Performance Measurement is an evaluation of how well a portfolio is doing and the primary measurement indicator is the rate of return .

The rate of return is defined as the investment related growth of an asset during a given time period .

There are two main types of rate of returns. Time weighted rate of return and money weighted rate of return .

Rate of return of a portfolio is compared against the return of its benchmark as a common performance evaluation mechanism.

Performance Attribution

Performance Attribution is about the different sources of returns . It answers the question of “Where did the returns come from for a fund/portfolio ? ”

An Individual managers superior return in comparison to a benchmark can be from two different sources :

1. From picking better performing assets

2. From selecting a different percentage of the asset

Performance Appraisal

Performance Appraisal is all about return vs risk .

There are three main ways to calculate return vs risk :

1. Ex – Post alpha method

2. Treynor measure

3. Sharpe Ratio . There is a variation that is also known as information ratio . Another variation known as M squared is sharpe ratio multiplied by market standard. Deviation and added to risk free rate .