COMPONENTS OF INVESTMENT PERFORMANCE *

COMPONENTS OF INVESTMENT PERFORMANCE * XXVII JUNE No. 3 COMPONENTS OF INVESTMENT PERFORMANCE* EUGENE FAMA$ F. I. INTRODUCTION THISPAPER SUGGESTS methods for evaluating investment performance. The topic is not new. Important work has been done by Sharpe [ Z l , 221, Treynor [231, and Jensen [ 13, 141. This past work has been concerned with measuring performance in two dimensions, return and risk. That is, how do the returns on the portfolios examined compare with the returns on other ‘haively selected” portfolios with similar levels of risk? This paper suggests somewhat finer breakdowns of performance. For example, methods are presented for distinguishing the part of an observed return that is due to ability to pick the best securities of a given level of risk (“selectivity”) from the part that is due to predictions of general market price movements (“timing”). The paper also suggests methods for measuring the effects of foregone diversification when an investment manager decides to concentrate his holdings in what he thinks are a few “winners.” Finally, most of the available work concentrates on single period evaluation schemes. Since almost all of the relevant theoretical material can be presented in this context, much of the analysis here is likewise concerned http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

COMPONENTS OF INVESTMENT PERFORMANCE *

The Journal of Finance, Volume 27 (3) – Jun 1, 1972

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Publisher
Wiley
Copyright
1972 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1972.tb00984.x
Publisher site
See Article on Publisher Site

Abstract

XXVII JUNE No. 3 COMPONENTS OF INVESTMENT PERFORMANCE* EUGENE FAMA$ F. I. INTRODUCTION THISPAPER SUGGESTS methods for evaluating investment performance. The topic is not new. Important work has been done by Sharpe [ Z l , 221, Treynor [231, and Jensen [ 13, 141. This past work has been concerned with measuring performance in two dimensions, return and risk. That is, how do the returns on the portfolios examined compare with the returns on other ‘haively selected” portfolios with similar levels of risk? This paper suggests somewhat finer breakdowns of performance. For example, methods are presented for distinguishing the part of an observed return that is due to ability to pick the best securities of a given level of risk (“selectivity”) from the part that is due to predictions of general market price movements (“timing”). The paper also suggests methods for measuring the effects of foregone diversification when an investment manager decides to concentrate his holdings in what he thinks are a few “winners.” Finally, most of the available work concentrates on single period evaluation schemes. Since almost all of the relevant theoretical material can be presented in this context, much of the analysis here is likewise concerned

Journal

The Journal of FinanceWiley

Published: Jun 1, 1972

References

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