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<br /> THE PERFORMANCE MEASUREMENT RESOURCE<br /> MPERAFSOURMEAMNECNET®<br /> THE JOURNAL OF<br /> VOLUME 19 : NUMBER 3<br /> INSIDE THIS ISSUE - SPRING 2015<br /> INSIDE THIS ISSUE - SPRING 2015<br /> n THE SHARPE RATIO REVISITED: WHAT IT REALLY TELLS US<br /> n COMPARING EX-ANTE TRACKING ERROR ESTIMATES ACROSS TIME<br /> n THE JOURNAL INTERVIEW - DAX JOHNSON<br /> n A PERIODIC TABLE OF RISK MEASURES - VERSION 2<br /> n RISK-ADJUSTED PERFORMANCE RATIOS: PART 1<br /> n MULTIPLE-PERIOD ATTRIBUTION: RESIDUAL AND COMPOUNDING<br /> A PUBLICATION OF THE SPAULDING GROUP, INC.<br /> What key investment decisions<br /> influence your performance?<br /> Performance, Attribution and Risk<br /> A unique ability to quantify the top-down decision making process enables us to provide insight<br /> into the added value throughout the decision making process, not just the bottom up decisions<br /> that are often given focus <a title="JPM_Spring2015_19-3 page 1" href="http://viewer.zmags.com/publication/27b0f1e9?page=1"> THE PERFORMANCE MEASUREMENT RESOURCE MPERAFSOURM</a> <a title="JPM_Spring2015_19-3 page 2" href="http://viewer.zmags.com/publication/27b0f1e9?page=2"> What key investment decisions influence your perfo</a> <a title="JPM_Spring2015_19-3 page 3" href="http://viewer.zmags.com/publication/27b0f1e9?page=3"> The Journal of Performance Measurement </a> <a title="JPM_Spring2015_19-3 page 4" href="http://viewer.zmags.com/publication/27b0f1e9?page=4"> The Journal of Performance Measure</a> <a title="JPM_Spring2015_19-3 page 5" href="http://viewer.zmags.com/publication/27b0f1e9?page=5"> Train Your Entire Performance Staff for HALF PRIC</a> <a title="JPM_Spring2015_19-3 page 6" href="http://viewer.zmags.com/publication/27b0f1e9?page=6"> Letter from the Editor “The cities where the ba</a> <a title="JPM_Spring2015_19-3 page 7" href="http://viewer.zmags.com/publication/27b0f1e9?page=7"> Letter from the Publisher In our last issue I r</a> <a title="JPM_Spring2015_19-3 page 8" href="http://viewer.zmags.com/publication/27b0f1e9?page=8"> The Sharpe Ratio Revisited: What It Really Tells </a> <a title="JPM_Spring2015_19-3 page 9" href="http://viewer.zmags.com/publication/27b0f1e9?page=9"> the Sharpe Ratio, and interestingly very few prac</a> <a title="JPM_Spring2015_19-3 page 10" href="http://viewer.zmags.com/publication/27b0f1e9?page=10"> positive - even those for which the mean differen</a> <a title="JPM_Spring2015_19-3 page 11" href="http://viewer.zmags.com/publication/27b0f1e9?page=11"> and the RAP have the same volatility. The authors</a> <a title="JPM_Spring2015_19-3 page 12" href="http://viewer.zmags.com/publication/27b0f1e9?page=12"> . (9) </a> <a title="JPM_Spring2015_19-3 page 13" href="http://viewer.zmags.com/publication/27b0f1e9?page=13"> skill and only rankings based on the M-cube provi</a> <a title="JPM_Spring2015_19-3 page 14" href="http://viewer.zmags.com/publication/27b0f1e9?page=14"> CONCLUSION This paper sought to revisit the Sharp</a> <a title="JPM_Spring2015_19-3 page 15" href="http://viewer.zmags.com/publication/27b0f1e9?page=15"> Comparing Ex-Ante1 Tracking Error Estimates Acros</a> <a title="JPM_Spring2015_19-3 page 16" href="http://viewer.zmags.com/publication/27b0f1e9?page=16"> way for an investment advisor to gauge what their</a> <a title="JPM_Spring2015_19-3 page 17" href="http://viewer.zmags.com/publication/27b0f1e9?page=17"> COMPARING THE RISK MODEL TRACKING ERROR STABILITY</a> <a title="JPM_Spring2015_19-3 page 18" href="http://viewer.zmags.com/publication/27b0f1e9?page=18"> bets versus Target over the entire test, it is in</a> <a title="JPM_Spring2015_19-3 page 19" href="http://viewer.zmags.com/publication/27b0f1e9?page=19"> tistics like active share and portfolio character</a> <a title="JPM_Spring2015_19-3 page 20" href="http://viewer.zmags.com/publication/27b0f1e9?page=20"> Model I Quarterly Test Results The Journal</a> <a title="JPM_Spring2015_19-3 page 21" href="http://viewer.zmags.com/publication/27b0f1e9?page=21"> Model II Quarterly Test Results ENDNOTES </a> <a title="JPM_Spring2015_19-3 page 22" href="http://viewer.zmags.com/publication/27b0f1e9?page=22"> The Journal Interview Dax Johnson, CFA is head of</a> <a title="JPM_Spring2015_19-3 page 23" href="http://viewer.zmags.com/publication/27b0f1e9?page=23"> rency changes and the ability to roll up constitu</a> <a title="JPM_Spring2015_19-3 page 24" href="http://viewer.zmags.com/publication/27b0f1e9?page=24"> see increased demand for book of record functions</a> <a title="JPM_Spring2015_19-3 page 25" href="http://viewer.zmags.com/publication/27b0f1e9?page=25"> Who’s Who in Performance and Risk Measurement </a> <a title="JPM_Spring2015_19-3 page 26" href="http://viewer.zmags.com/publication/27b0f1e9?page=26"> How long have you been in performance and risk me</a> <a title="JPM_Spring2015_19-3 page 27" href="http://viewer.zmags.com/publication/27b0f1e9?page=27"> A Periodic Table of Risk Measures – Version 2 A p</a> <a title="JPM_Spring2015_19-3 page 28" href="http://viewer.zmags.com/publication/27b0f1e9?page=28"> DESCRIPTIVE STATISTICS 1st moment 2nd m</a> <a title="JPM_Spring2015_19-3 page 29" href="http://viewer.zmags.com/publication/27b0f1e9?page=29"> The 3rd moment, skewness their ow</a> <a title="JPM_Spring2015_19-3 page 30" href="http://viewer.zmags.com/publication/27b0f1e9?page=30"> value at risk or VaR. I pondered the order of thi</a> <a title="JPM_Spring2015_19-3 page 31" href="http://viewer.zmags.com/publication/27b0f1e9?page=31"> Risk-Adjusted Performance Ratios: Part 1 This art</a> <a title="JPM_Spring2015_19-3 page 32" href="http://viewer.zmags.com/publication/27b0f1e9?page=32"> is to the investor, and a prudent investment mana</a> <a title="JPM_Spring2015_19-3 page 33" href="http://viewer.zmags.com/publication/27b0f1e9?page=33"> Table 1: Two Managers: Same Average Return, but t</a> <a title="JPM_Spring2015_19-3 page 34" href="http://viewer.zmags.com/publication/27b0f1e9?page=34"> When we calculate the standard deviation, we basi</a> <a title="JPM_Spring2015_19-3 page 35" href="http://viewer.zmags.com/publication/27b0f1e9?page=35"> in my 10-year history of performance, let’s say I</a> <a title="JPM_Spring2015_19-3 page 36" href="http://viewer.zmags.com/publication/27b0f1e9?page=36"> calculation. Downside deviation is focusing on lo</a> <a title="JPM_Spring2015_19-3 page 37" href="http://viewer.zmags.com/publication/27b0f1e9?page=37"> ear regression, so for a Cartesian system (see Ta</a> <a title="JPM_Spring2015_19-3 page 38" href="http://viewer.zmags.com/publication/27b0f1e9?page=38"> Table 5: Tracking Error Example annu</a> <a title="JPM_Spring2015_19-3 page 39" href="http://viewer.zmags.com/publication/27b0f1e9?page=39"> 15 $5,000 10 </a> <a title="JPM_Spring2015_19-3 page 40" href="http://viewer.zmags.com/publication/27b0f1e9?page=40"> Drawdown 4 (26 to 28): skill tha</a> <a title="JPM_Spring2015_19-3 page 41" href="http://viewer.zmags.com/publication/27b0f1e9?page=41"> for our traditional portfolios, two types of meas</a> <a title="JPM_Spring2015_19-3 page 42" href="http://viewer.zmags.com/publication/27b0f1e9?page=42"> being risk-free? That’s the Sharpe Ratio. Graphic</a> <a title="JPM_Spring2015_19-3 page 43" href="http://viewer.zmags.com/publication/27b0f1e9?page=43"> vations of performance. The risk-free rate here, </a> <a title="JPM_Spring2015_19-3 page 44" href="http://viewer.zmags.com/publication/27b0f1e9?page=44"> than the other portfolio. In terms of a number, i</a> <a title="JPM_Spring2015_19-3 page 45" href="http://viewer.zmags.com/publication/27b0f1e9?page=45"> risky, and then the same thing with the risk-adju</a> <a title="JPM_Spring2015_19-3 page 46" href="http://viewer.zmags.com/publication/27b0f1e9?page=46"> benchmark and to see what that adjustment to risk</a> <a title="JPM_Spring2015_19-3 page 47" href="http://viewer.zmags.com/publication/27b0f1e9?page=47"> Figure 6 it in the form of a return, some would s</a> <a title="JPM_Spring2015_19-3 page 48" href="http://viewer.zmags.com/publication/27b0f1e9?page=48"> Figure 7: Visualizing What's Going on with the M-</a> <a title="JPM_Spring2015_19-3 page 49" href="http://viewer.zmags.com/publication/27b0f1e9?page=49"> manager is exhibiting better skill, and that’s be</a> <a title="JPM_Spring2015_19-3 page 50" href="http://viewer.zmags.com/publication/27b0f1e9?page=50"> Multiple-Period Attribution: Residuals and Compou</a> <a title="JPM_Spring2015_19-3 page 51" href="http://viewer.zmags.com/publication/27b0f1e9?page=51"> difference between the portfolio’s actual added v</a> <a title="JPM_Spring2015_19-3 page 52" href="http://viewer.zmags.com/publication/27b0f1e9?page=52"> for this problem by reducing the length of time u</a> <a title="JPM_Spring2015_19-3 page 53" href="http://viewer.zmags.com/publication/27b0f1e9?page=53"> Table1:ExampleofaMultiple-PeriodAttribution Spri</a> <a title="JPM_Spring2015_19-3 page 54" href="http://viewer.zmags.com/publication/27b0f1e9?page=54"> Table 2: Weighted Risk Premiums Table 3</a> <a title="JPM_Spring2015_19-3 page 55" href="http://viewer.zmags.com/publication/27b0f1e9?page=55"> many Brinson Partners investment managers and ana</a> <a title="JPM_Spring2015_19-3 page 56" href="http://viewer.zmags.com/publication/27b0f1e9?page=56"> The Journal</a> <a title="JPM_Spring2015_19-3 page 57" href="http://viewer.zmags.com/publication/27b0f1e9?page=57"> </a> <a title="JPM_Spring2015_19-3 page 58" href="http://viewer.zmags.com/publication/27b0f1e9?page=58"> Be confident in the results you deliver ● Levera</a>