Executive Summary The foremost purpose of this report is to evaluate the performance of the managed portfolio over 9 weeks trading period from 11th of March to 11th of May 2012. This report is prepared to verify if the portfolio had any abnormal performance and also to identify whether it is over-performed or under-performed. The portfolio will be known as Portfolio A and throughout the report, Portfolio A’s performance will be assessed in terms of breadth and depth against the MSCI World Index’s portfolio performance. Breadth refers to the number of different securities for which a manager can generate excess returns, which implies the capability to completely eliminate all unsystematic risk relative to the portfolio’s benchmark. Depth, on the other hand, refers to the size of the scale of the abnormal or excess returns earned, which is the ability to earn “above-average” returns. The measurement breadth will be acquired through the regression analysis and risk adjusted performance measure, namely, Capital Market Line (CML), Capital Allocation Line (CAL), the Sharpe Ratio and the M2 index. The depth of the portfolio is assessed by evaluating the portfolio’s Security Characteristics Line (SCL) and the R2 simultaneously with the discussion of the slope, intercept, and statistical significance. The Treynor measure and the Security Market Line (SML) will also be used to determine the location of Portfolio A in order to get a better observation on its depth. Evidently, an effective and well managed portfolio possesses breadth and depth that seize high earnings and a well-diversified portfolio that helps reduce or eliminate unsystematic risk. This report contrasts Portfolio A with a highly diversified equity portfolio as the benchmark, which is the MSCI World Index. The compilation of the weekly and monthly holding period rate of returns (HPR), as well as the excess returns for both Portfolio A and MSCI are shown in Table 1 and 2 respectively. The calculations of geometric mean for both portfolios will be shown consequently. Table 1 – Portfolio A’s Weekly Returns
Week
Portfolio Value
Weekly HPR
Montly HPR
Excess Return =
HPR - Rf
0
1000000
Analysis on breadth and depth of Portfolio A
Expected Return and Standard Deviation The Capital Market Line (CML) illustrates the performance of the market index – the MSCI World Index – which is the blue trend line shown in Graph 1. The red trend line, on the other hand, represents the performance of Portfolio A which is the Capital Allocation Line (CAL). Based on Graph 1, the CAL is situated above the CML. Both trend lines are downward sloping, which indicates that both portfolios are at loss. Nonetheless, since Portfolio A’s slope is flatter than MSCI’s slope, it shows that at every level of expected return, Portfolio A has higher risks compared to MSCI and at every level of risk, Portfolio A has higher returns compared to MSCI. This can be seen in their expected return and standard deviation, where Portfolio A has an expected return or arithmetic average of -0.45% with a standard deviation of 7.37% while MSCI has an expected return of -1.65% with a standard deviation of 6.82%. Evidently, MSCI
