Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-15T17:18:42.388Z Has data issue: false hasContentIssue false
  • English
  • Français

Composite Measures for the Evaluation of Investment Performance

Published online by Cambridge University Press:  06 April 2009

James S. Ang  and
Jess H. Chua
Get access Rights & Permissions [Opens in a new window]

Extract

The composite measures of investment performance: the reward-to-variability index, by Sharpe ([29], [30]) and Lintner [23], and the reward-to-volatility index, by Treynor [33], were developed after Markowitz ([24], [25]) and Tobin [32] popularized the mean-variance framework of analyzing the problems of certain investments. Since these are ex ante measures they are not directly applicable to the evaluation of ex post performance. A theoretical basis for doing so has been provided by Jensen ([17], [18]) who also developed another composite performance measure, the predictability index. In practice, these composite measures have been found to have problems. Foremost, they have been observed to exhibit systematic biases. Various causes of the biases have been proposed. These are: the existence of unequal lending and borrowing rates, the failure to consider higher moments of return distributions, and the elusive “true” holding period.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 2 , June 1979 , pp. 361 - 384
Copyright
Copyright © School of Business Administration, University of Washington 1979

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Arditti, F. D. “Risk and the Required Return on Equity.” Journal of Finance (03 1967), pp. 909–912.Google Scholar
[2]Arditti, F. D.. “Another Look at Mutual Fund Performance.” Journal of Financial and Quantitative Analysis (06 1971), pp. 909–912.CrossRefGoogle Scholar
[3]Arditti, F. D.. “Skewness and Investors' Decisions: A Reply.” Journal of Financial and Quantitative Analysis (03 1975), pp. 173–176.CrossRefGoogle Scholar
[4]Black, F. “Capital Market Equilibrium with Restricted Borrowing.” Journal of Business (07 1972), pp. 444–455.CrossRefGoogle Scholar
[5]Black, F., Jensen, M., and Scholes, M.. “The Capital Asset Pricing Model: Some Empirical Results.” In Studies in the Theory of Capital Markets, edited by Jensen, M.. New York: Praeger (1972).Google Scholar
[6]Bower, R. S., and Wippern, R. F.. “Risk-Return Measurement in Portfolio Selection and Performance Appraisal Models: Progress Report.” Journal of Financial and Quantitative Analysis (12 1969), pp. 417–447.CrossRefGoogle Scholar
[7]Carlson, R. S. “Aggregate Performance of Mutual Funds, 1948–1967.” Journal of Financial and Quantitative Analysis (03 1970), pp. 1–32.CrossRefGoogle Scholar
[8]Cheng, P. L., and Deets, M. King. “Systematic Risk and the Horizon Problem.” Journal of Financial and Quantitative Analysis (03 1973), pp. 299–316.CrossRefGoogle Scholar
[9]Evans, J. L., and Archer, S. H.. “Diversification and the Reduction of Dispersion: An Empirical Analysis.” Journal of Finance (12 1968), pp. 761–767.Google Scholar
[10]Fama, E. “Components of Investment Performance.” Journal of Finance (06 1972), pp. 551–567.Google Scholar
[11]Friend, I., and Blume, M.. “Measurement of Portfolio Performance Under Uncertainty.” American Economic Review (09 1970), pp. 561–575.Google Scholar
[12]Gaumnitz, J. E. “Appraising Performance of Investment Portfolios.” Journal of Finance (06 1970), pp. 555–560.CrossRefGoogle Scholar
[13]Hogan, W., and Warren, J.. “Toward the Development of an Equilibrium Capital— Market Model Based on Semivariance.” Journal of Financial and Quantitative Analysis (01 1974), pp. 1–11.CrossRefGoogle Scholar
[14]Ingersoll, J. “Multidimensional Security Pricing.” Journal of Financial and Quantitative Analysis (12 1975), pp. 785–798.CrossRefGoogle Scholar
[15]Jean, W. H. “The Extension of Portfolio Analysis to Three or More Parameters.” Journal of Financial and Quantitative Analysis (01 1971), pp. 505–14.CrossRefGoogle Scholar
[16]Jean, W. H.. “More on Multidimensional Portfolio Pricing.” Journal of Financial and Quantitative Analysis (06 1973), pp. 475–90.CrossRefGoogle Scholar
[17]Jensen, M. C. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance (05 1968), pp. 389–416.Google Scholar
[18]Jensen, M. C.. “Risk, Capital Assets, and the Evaluation of Investment Portfolio.” Journal of Business (04 1969), pp. 167–247.CrossRefGoogle Scholar
[19]Klemkoskey, R. C. “The Bias in Composite Performance Measures.” Journal of Financial and Quantitative Analysis (06 1973), pp. 505–14.CrossRefGoogle Scholar
[20]Kraus, A., and Litzenberger, R. H.. “Skewness Preference and the Valuation of Risk Assets.” Journal of Finance (09 1976), pp. 1085–1100.Google Scholar
[21]Lee, C. F. “On the Relationship Between the Systematic Risk and the Investment Horizon.” Journal of Financial and Quantitative Analysis (12 1976), pp. 803–15.CrossRefGoogle Scholar
[22]Levy, H. “Portfolio Performance and the Investment Horizon.” Management Science (08 1972), pp. B645–B653.CrossRefGoogle Scholar
[23]Lintner, J. “Security Prices, Risk and Maximal Gains from Diversification.” Journal of Finance (12 1965), pp. 587–615.Google Scholar
[24]Markowitz, H. “Portfolio Selection.” Journal of Finance (03 1952), pp. 77–91.Google Scholar
[25]Markowitz, H.. Portfolio Selection: Efficient Diversification of Investments. New York: J. Wiley (1959).Google Scholar
[26]McDonald, J. G. “French Mutual Fund Performance: Evaluation of Internationally-Diversified Portfolios.” Journal of Finance (12 1973), pp. 1161–80.Google Scholar
[27]McDonald, J. G.. “Objectives and Performance of Mutual Funds, 1960–69.” Journal of Financial and Quantitative Analysis (06 1974), pp. 311–33.CrossRefGoogle Scholar
[28]McEnally, R. W. “A Note on the Return Behavior of High Risk Common Stocks.” Journal of Finance (03 1974), pp. 199–202.CrossRefGoogle Scholar
[29]Sharpe, W. F. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” Journal of Finance (09 1964), pp. 425–42.Google Scholar
[30]Sharpe, W. F.. “Mutual Fund Performance.” Journal of Business (01 1966), pp. 119CrossRefGoogle Scholar
[31]Smith, K. V., and Tito, D. A.. “Risk-Return Measures of Ex Post Portfolio Performance.” Journal of Financial and Quantitative Analysis (12 1969), pp. 449–71.CrossRefGoogle Scholar
[32]Tobin, J. “Liquidity Preference as Behavior Towards Risk.” Review of Economic Studies (02 1958), pp. 65–85.CrossRefGoogle Scholar
[33]Treynor, J. L. “How to Rate Management of Investment Funds.” Harvard Business Review (01–02 1965), pp. 63–75.Google Scholar