The diversification of investment and elimination of unsystematic risk can be achieved first by measuring the level of diversification needed. Diversification can be computed through correlation between returns and of the portfolio and the market portfolio. An absolutely diversified portfolio will correlate accurately with completely diversified market portfolio since only has a systematic risk.
Portfolio performance measures are the most important aspects of the investment process. Performance measures enable the availability of information necessary for investors to make a decision on how effectively the money has been invested or should be invested. Evaluation of risk-adjusted returns enable the investor to have a clearer view of the market expectations.
Treynor Portfolio Performance Measure (reward to volatility ratio)
This performance measure was developed in 1965 by Jack Treynor to evaluate funds based on what is known as Treynor’s Index. Treynor’s Index is the ratio of return from a fund over and above the risk-free rate of return for a given period and the systematic associated risk. With this CAPM we can determine the how the security and the market related. Deviations from Treynor’s view are expected to cancel out wherever there is a fully diversified portfolio. If Treynor’s Index is high, it …show more content…
There is a need for investors to use world proxy for a more theoretical market portfolio. In general, analysts rely on S&P500 Index as a proxy. This index does not in itself constitute a real market portfolio but includes stocks commonly traded on the NYSE. This is what is known as the benchmark error (Roll, 1981). Market portfolio is used to compute the beta value. In this regard Roll argued that whenever there is inefficiency on the proxy used for the market portfolio, the computed betas will not be suitable. The correct SML are likely to have a lower slope or a higher
Portfolio performance measures are the most important aspects of the investment process. Performance measures enable the availability of information necessary for investors to make a decision on how effectively the money has been invested or should be invested. Evaluation of risk-adjusted returns enable the investor to have a clearer view of the market expectations.
Treynor Portfolio Performance Measure (reward to volatility ratio)
This performance measure was developed in 1965 by Jack Treynor to evaluate funds based on what is known as Treynor’s Index. Treynor’s Index is the ratio of return from a fund over and above the risk-free rate of return for a given period and the systematic associated risk. With this CAPM we can determine the how the security and the market related. Deviations from Treynor’s view are expected to cancel out wherever there is a fully diversified portfolio. If Treynor’s Index is high, it …show more content…
There is a need for investors to use world proxy for a more theoretical market portfolio. In general, analysts rely on S&P500 Index as a proxy. This index does not in itself constitute a real market portfolio but includes stocks commonly traded on the NYSE. This is what is known as the benchmark error (Roll, 1981). Market portfolio is used to compute the beta value. In this regard Roll argued that whenever there is inefficiency on the proxy used for the market portfolio, the computed betas will not be suitable. The correct SML are likely to have a lower slope or a higher