How to calculate Portfolio Performance By – Yogesh Sane
Why Measure Performance? You can’t manage what you can’t measure. Are your efforts paying off? What can you expect as future returns?
Information Required Monthly/Quarterly/Annual Holding Statement(s). Monthly/Quarterly/Annual Cash Statement for your broker account(s). Amount and date of all net cashflows. Portfolio Value on all Cashflow dates (only for Time-Weighted Return). Transactions are not needed.
Time-Weighted Vs Money-Weighted Returns Time Weighted Returns Money Weighted Returns Calculated by geometric linking of holding period returns between cashflow dates over the calculation period. Rate of return that will set the present values of all cash flows and terminal values equal to the value of the initial investment. Not impacted by timing and size of cashflows. Accurately reflects timing and size of cashflows and amount invested. Indicates the return generated by investment strategy. Indicates returns actually earned by the investor. Reflects the stock selection and portfolio construction skills Reflects the market timing skills Appropriate measure for comparison between strategies or managers. Can be significantly different from TWR in case of substantial cashflows in the portfolio. Requires portfolio valuation on all cashflow dates and beginning and ending dates. Requires portfolio valuation only at the beginning and ending dates. Generally easy to calculate using simple arithmetic. Requires computer algorithms that use quadratic programming (Excel).
Additional Performance Metrics Formula Description Risk Standard Deviation of periodic returns Measures the ups and downs in your portfolio. How bumpy is your portfolio? Alpha Portfolio returns minus benchmark returns. Excess returns over benchmark. Are you beating your benchmark? Beta Covariance of portfolio returns and benchmark returns divided by variance of benchmark returns Measures zig-zag of your portfolio relative to benchmark. Are you riding the waves in the market or swimming against the current? Sharpe Ratio Excess return over risk free rate divided by standard deviation of portfolio returns. Measures risk adjusted return. Are you a good investor or just a good equity investor? Information Ratio Average of alpha returns divided by Standard Deviation of alpha returns. Are you a skilled investor or just got lucky? Are you generating consistently good performance or a one-trick pony?