The Jensen’s Alpha is a popular risk-adjusted performance measure used by portfolio managers to determine how much excess returns their portfolio has generated over and above the market returns as suggested by the CAPM model. A positive alpha indicates that the portfolio has outperformed the market, and vice versa. The Jensen’s Alpha can be calculated […]

# Portfolio Management

## A Value Investing Approach to Manage an Equity Portfolio

This presentation by Vincenzo Boin makes the case of a value investing approach to manage an equity portfolio. Such an approach is suitable for long term risk-averse investors. “We should remember that there is a large body of research stating that on average value stocks do outperform growth, the result is more pronounced with small […]

## Question: Performance Measurement Using Index Model Regression

This question appeared in one of the university exams for portfolio management. I’ve provided the question along with the detailed answer. Consider the two (excess return) index-model regression results for Portfolio A and B. The risk-free rate over the period was 6%, and the market’s average return was 14%. Performance is measured using an index […]

## How Do Hedge Funds Manage Portfolio Risk?

This video by Gavin Cassar and Joseph Gerako investigates the determinants and outcomes of methods that hedge funds use to manage portfolio risk. The presenters through their reserach found that there is tererogeneity in the methods that hedge funds use to manage portfolio risk. The funds that used formal models of portfolio risk did relative […]

## How to Calculate Portfolio Risk and Return

In this article, we will learn how to compute the risk and return of a portfolio of assets. Let’s start with a two asset portfolio. Portfolio Return Let’s say the returns from the two assets in the portfolio are R1 and R2. Also, assume the weights of the two assets in the portfolio are w1 […]

## Selecting Optimal Portfolio for an Investor

In the previous articles, we learned that an investor can invest in a combination of risk-free asset and risky assets anywhere on the capital allocation line. A rational investor is also risk-averse and has a utility indifference curve that characterizes his risk-return expectations. However, the problem is that on the capital allocation line, the investor can create […]

## Capital Allocation Line with Two Assets

We know that an investor can combine many risky assets to create a portfolio with lower risks. By varying the weights of different assets in the portfolio many portfolios with different risk-return profiles can be created. If we plot the risk-return profiles of these different portfolios, what we get is an efficient frontier. The efficient […]

## Utility Indifference Curves for Risk-averse Investors

In the previous article we learned that different investors exhibit different levels of risk aversion. For each investor the degree of risk aversion translates into certain utility (read satisfaction) that he gets from an investment. In our example of $100 for sure vs. a gamble where you get $200 or nothing, when a risk averse […]

## Risk Aversion of Investors and Portfolio Selection

We have seen that different asset classes such as bonds, stocks, and commodities provide different levels of risk and return to investors. However, we also know that these investment options are not equally preferred by all investors. An equity stock providing high returns may be suitable for one investor but another investor may want to […]

## Effect of Correlation on Diversification

In this article, we will look at how correlation affects the diversification benefits of a portfolio. Let’s take a portfolio with two assets. The correlation between the two assets can range from -1.0 to 1.0 and depending on the correlation figure the shape of the efficient frontier will change. The following graph shows how the […]