Introduction

Welcome to Portfolio Performance Measures: the toolkit for evaluating how well a portfolio actually performed and whether the manager earned their fees.

Exam Weight: Part of 30 questions

What You'll Learn

In this unit, you'll cover:

• Current Yield: How to calculate the income return on bonds and stocks using annual income and market price
• Relevant Benchmarks: How to select appropriate benchmarks and why comparing a small-cap fund to the S&P 500 gives you a misleading picture
• Returns: The many ways to measure portfolio performance, including total return, holding period return, time-weighted vs. dollar-weighted, risk-adjusted measures (Sharpe, Treynor, alpha), inflation-adjusted, and after-tax returns

Why This Matters

Measuring performance sounds simple: did the portfolio go up or down? But the exam expects you to know which return measure to use in each situation. A portfolio manager's skill is measured differently than an investor's actual experience. Two portfolios with identical returns can look very different once you account for the risk each one took. And comparing performance to the wrong benchmark can make a mediocre manager look brilliant (or a great one look incompetent).

This unit builds directly on the capital market theory and portfolio management concepts you've already covered. Now you'll apply those frameworks to evaluate results.

Let's start with current yield, the simplest performance measure.