Classical Portfolio Performance Measures: A Primer

47 Pages Posted: 9 Feb 2020 Last revised: 26 May 2020

See all articles by Pascal Francois

Pascal Francois

HEC Montreal - Department of Finance

Georges Hübner

HEC Liège

Date Written: May 25, 2020

Abstract

In this primer, we review the classical methods for assessing the performance of a financial portfolio. The analysis relies on benchmarking the return on the portfolio with that of a peer group. We define and discuss the pros and cons of four performance metrics that are theoretically consistent with the CAPM and widely used in the industry: The Sharpe Ratio, the Treynor Ratio, Jensen’s alpha, and the Information Ratio. We examine the practical as well as the statistical significance of these measures in the case where the returns on the underlying assets are i.i.d. Gaussian. Numerical implementation of these methods is illustrated through a simplified, yet realistic example.

Keywords: Portfolio Performance, Sharpe Ratio, Jensen's alpha, Treynor Ratio, Information Ratio, Peer Group Comparison

JEL Classification: G11, G12, G14, C12, B26

Suggested Citation

Francois, Pascal and Hübner, Georges, Classical Portfolio Performance Measures: A Primer (May 25, 2020). Available at SSRN: https://ssrn.com/abstract=3520093 or http://dx.doi.org/10.2139/ssrn.3520093

Pascal Francois

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

Georges Hübner (Contact Author)

HEC Liège ( email )

Rue Louvrex 14, Bldg. N1
Liege, 4000
Belgium
+32 42327428 (Phone)

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