Chapter 1: Portfolio Performance Evaluation

In this section

• Overview of the Evaluation Process: Measurement, Attribution, and Appraisal
  Discover how Measurement, Attribution, and Appraisal form the bedrock of portfolio performance evaluation. Learn essential return measures (TWR, MWR), how to dissect performance drivers, and ways to assess manager skill.
• Attributes of an Effective Attribution Process
  Discover the core components of an effective portfolio performance attribution process, focusing on accuracy, consistency, transparency, timeliness, relevance, and actionability for improved investment decisions.
• Comparing Return Attribution vs. Risk Attribution; Macro vs. Micro Attribution
  Explore the fundamentals of measuring and analyzing performance through return and risk attribution, and learn how macro vs. micro approaches offer unique insights into portfolio decisions.
• Performance Attribution Approaches: Returns‑Based, Holdings‑Based, and Transactions‑Based
  Explore three essential performance attribution approaches—returns-based, holdings-based, and transactions-based—and learn their mechanics, advantages, drawbacks, and best-use scenarios for portfolio evaluation.
• Interpreting Attribution Results for Fixed‑Income Portfolios
  Discover how to effectively measure and interpret performance drivers in fixed-income portfolios, focusing on duration, spreads, sector allocation, and credit considerations.
• Selecting a Risk Attribution Approach
  Discover various methods to break down and assess portfolio risks, including factor-based and marginal approaches, as well as scenario testing, to guide effective portfolio decisions.
• Distinguishing Asset Owner vs. Investment Manager Contributions
  Explore how to distinguish performance contributions by asset owners versus investment managers, focusing on strategic vs. tactical decisions, macro attribution, and best practices for performance evaluation.
• Benchmark Types and Liability‑Based Benchmarks
  Deep dive into various benchmark types, including market indexes, custom strategies, peer comparisons, absolute return targets, and liability-based benchmarks for expenditure-driven investment planning.
• Tests of Benchmark Quality and Effects of Misspecification
  Explore the six key criteria for benchmark quality, learn how to identify benchmark misspecification, and discover strategies to ensure accurate performance evaluation in portfolio management.
• Benchmarking Challenges in Alternative Investments
  Explore the complexities in creating effective benchmarks for illiquid asset classes, hedge funds, and other alternative investments, with a focus on overcoming self-reported data, survivorship bias, and long time horizons.
• Risk‑Adjusted Return Measures (Sortino, Appraisal Ratio, Capture Ratios)
  Explore in-depth how to measure performance using the Sortino Ratio, Appraisal Ratio, and Upside/Downside Capture Ratios, their calculations, practical considerations, and real-world applications for portfolio managers.
• Evaluating Manager Skill and Limitations of Appraisal Measures
  Explore quantitative and qualitative methods for assessing investment manager skill, learn the weaknesses of appraisal ratios, and discover strategies to mitigate these limitations.
• Factor‑Based Performance Attribution for Multi‑Asset Portfolios
  Discover how factor-based strategies clarify multi-asset returns by isolating contributions from multiple exposures, helping portfolio managers refine asset allocation and identify skill.
• Multi‑Period Performance Measurement Considerations
  Explore how to accurately evaluate portfolio performance across multiple periods, covering everything from cash flow impacts to geometric linking, with practical examples and best practices.
• Impact of ESG on Attribution and Appraisal
  Discover how environmental, social, and governance factors shape performance attribution and appraisal in modern portfolio management.
• Considerations for Multi‑Currency Portfolios
  Explore the impact and attribution of currency exposures in global portfolios, including hedging approaches, performance decomposition, and best practices for clear multi-currency reporting.
• The Role of Transaction Costs in Performance Measurement
  Explore explicit and implicit trading costs, attribution methods like Implementation Shortfall, and practical examples of how transaction costs influence portfolio performance reporting.
• Linking Attribution Across Subperiods
  Explore how to effectively link performance attribution across multiple subperiods, covering arithmetic vs. geometric methods, challenges, and best practices.