1. What major requirements do client expect from their portfolio managers?
We have two major requirements of a Portfolio Manager:
1. The ability to derive above average returns for a given risk class (large risk-adjusted returns); and 2. The ability to completely diversify the portfolio to eliminate all unsystematic risk.
The client expect from their portfolio managers are to help them manage their money in less time. Most of the client requires a portfolio manager who can preserve their money on time, who can plan in saving of his client according to their need and preferences, who can discuss any concerns regarding money or saving, the client can interact with his appointed portfolio manager on monthly basis.
In summary, constructing a policy statement is mainly the investor’s responsibility. It is a process whereby investors articulate their realistic needs and goals and become familiar with financial markets and investing risks. Without this information, investors cannot adequately communicate their needs to the portfolio manager. Without this input from investors, the portfolio manager cannot construct a portfolio that will satisfy clients’ needs; the result of bypassing this step will most likely be future aggravation, dissatisfaction, and disappointment.
2. What can a portfolio manager do to attain superior performance?
With this in mind, we say a function is an “admissible performance measure” if it satisfies the following four minimal conditions. First, it assigns zero performance to every portfolio in some reference set. For instance, if the uninformed investors constitute the investing public, the reference set will then contain all portfolio returns that are achievable by any uninformed investor. More generally, the reference portfolio set can be enlarged to include all dynamic portfolios that are obtainable using public information.
Second, the function is linear so that a manager cannot create better or worse performance by simply re- bundling other funds. This ensures that superior performance is only a result of superior information.
Third, the function is continuous, which guarantees that any two funds whose returns are indistinguishable from one another will always be assigned performance values that are arbitrarily close. This imposes some sense of fairness to all fund managers.
Finally, the function is nontrivial in the sense that if a fund’s excess return over a reference portfolio is proportional to some traded security’s payoff, the fund will not be assigned a zero performance.
3. What is the peer group comparison method of evaluating an investor’s performance?
A different method for benchmarking is to use peer-group measures - that is, to see how your portfolio/fund performs against those that have the same characteristics, e.g. objective and composition. Peer-group measurements are in some ways more authentic than indices because they average the performance of other actively managed funds, rather than the theoretical performance of an index.
However, care should be taken in using this measure, as there are various portfolio types, which are structured based on various objectives and risk profiles. Thus investors should be mindful of comparing their portfolios with other portfolios that do not have the same objectives as theirs. So in measuring performance using peer group, the investor should use the same time period, portfolio composition and investment objectives as basis for comparison.
4. What is the treynor portfolio performance measure?
Jack L. Treynor was the first to provide investors with a composite measure of portfolio performance that also included risk. Treynor's objective was to find a performance measure that could apply to all investors, regardless of their personal risk preferences. He suggested that there were...
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