Introduction

Performance analysis can be considered the final stage in the portfolio management process as it provides an overall evaluation of the success of the investment management in reaching its expected performance objective. Furthermore, it identifies the individual contributions of each of its components and underlying strategies to the overall performance result. The term ‘performance analysis’ covers all the techniques that are implemented to study the financial results obtained in the portfolio management process, ranging from simple performance measurement to performance attribution. This chapter deals with performance measurement, which in turn can be loosely defined as the analytical framework underlying the calculation and assessment of investment returns. Chapter 6 introduces performance attribution as the second leg of a performance analysis.

Where Markowitz (1952) is often considered to be the founder of modern portfolio theory (the analysis of rational portfolio choices based on the efficient use of risk), Dietz (1966) may be seen as the father of investment performance analysis. The theoretical foundations of performance analysis can be traced back to classic economic equilibrium and corporate finance theory. Over the years, numerous new concepts that describe the interdependencies between return (ex ante and ex post) and risk measures by the application of specific factor models have been incorporated into the evaluation of investment performance (e.g. Treynor 1965; Sharpe 1966; Jensen 1968). Most of these models can be implemented directly into the evaluation framework, whereby the choice of a method should match the investment style of the portfolio management.