Security Analysis and Portfolio Management (SAPM)- Portfolio Evaluation under Treynor's Performance Index- MBA

1. A Presentation on The
Security Analysis and Portfolio Management(18MS03F4)
3rd Unit: Portfolio Evaluation and Revision
2nd Mid Topic: Treynor Portfolio Performance Measure
As a part of 3rd semester Curriculum Submission to
The Department of Management Science
of
Sasi Institute Of Technology & Engineering (Autonomous),
SITE
Submitted by :
Immani.Chandra Shekar
(Reg. No: 19K61E0020)
Under the Guidance of :
Mr. Mr. N. Suresh Babu Sir
Assistant Professor

2. The portfolio performance evaluation involves the determination of how a
managed portfolio has performed relative to some comparison benchmark.
The evaluation can indicate the extent to which the portfolio has outperformed
or under-performed, or whether it has performed at par with the benchmark.
Portfolio manager evaluates his portfolio performance and identifies the sources
of strength and weakness. The evaluation of the portfolio provides a feedback
about the performance to evolve better management strategy
Portfolio Performance Evaluation :
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3. The evaluation of portfolio performance is important for several reasons:
• First, the investor, whose funds have been invested in the portfolio, needs to
know the relative performance of the portfolio.
• The performance review must generate and provide information that will
help the investor to assess any need for rebalancing of his investments.
• Second, the management of the portfolio needs this information to evaluate
the performance of the manager of the portfolio and to determine the
manager’s compensation, if that is tied to the portfolio performance.
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4. 1.Conventional Methods
 Benchmark Comparison
 Style Comparison
• value style,
• growth style
The performance evaluation methods generally fall into two categories,
namely conventional and risk-adjusted methods.
2.Risk-adjusted Methods
 Jensen’s Performance Index,
 Sharpe’s Performance Index,
 Treynor’s Performance Index
Performance Evaluation Methods:
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5. Treynor’s Performance Index:
• The Treynor ratio computes the risk premium per unit of systematic risk.
• The difference in this method is in that it uses the systematic risk of the
portfolio as the risk parameter.
• The systematic risk is that part of the total risk of an asset which cannot be
eliminated through diversification.
• It is measured by the parameter known as ‘beta’ that represents the slope of
the regression of the returns of the managed portfolio on the returns to the
market portfolio.
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6. The relationship between the ideal fund's rate of return and the market's rate
of return is given by the figure below:
Treynor's Index (Tt) = (Rt - R)/Bt
Whereas,
Tt = Treynor’s measure of portfolio
Rt = Return of the portfolio
R = Risk less rate of return
Bt = Beta coefficient or volatility of the portfolio
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7. To illustrate: Suppose that the 10-year annual return for the S&P 500 (market
portfolio) is 10% while the average annual return on Treasury bills (a good proxy for
the risk-free rate) is 5%. Then, assume the evaluation is of three distinct portfolio
managers with the following 10-year results:
Managers Average Annual Return Beta
Manager A 10% 0.90
Manager B 14% 1.03
Manager C 15% 1.20
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8. Solution: The Treynor value for each is as follows:
Portfolio Mangers Calculation Treynor Value/ratio
T(market) (0.10-0.05)/1 0.05
T(manager A) (0.10-0.05)/0.90 0.056
T(manager B) (0.14-0.05)/1.03 0.087
T(manager C) (0.15-0.05)/1.20 0.083
Interpretation: The higher the Treynor measure, the better the portfolio. If the portfolio
manager (or portfolio) is evaluated on performance alone, manager C seems to have yielded
the best results. However, when considering the risks that each manager took to attain their
respective returns, Manager B demonstrated a better outcome. In this case, all three
managers performed better than the aggregate market. 7

9. Department of Management Science
Thank You Sir
2020-2021