How is a portfolio’s performance measured?

The performance of a portfolio is typically looked at in terms of two types of measures:  absolute and relative measures.

Absolute measures are metrics that assess the portfolio’s performance in absolute terms.  Examples include the total return, which reflects the percentage change in the portfolio’s value over a given period, including both capital gains and income, and the total return expressed as an annualized rate.

Relative measures, on the other hand, compare the portfolio’s performance to a benchmark or peer group, and so reflect its performance relative to the chosen benchmark. Some common relative measures include the Sharpe ratio, which measures the portfolio’s risk-adjusted return compared to a risk-free rate, and the information ratio, which measures the portfolio’s excess return compared to a benchmark adjusted for risk.

Other metrics that can be used to review a portfolio performance include volatility or standard deviation, which indicates the degree of fluctuation in the portfolio’s returns, and drawdown, which measures the maximum loss from peak to trough in a portfolio’s value over a given period.

It is important that you understand and agree with the measures your advisor has chosen to apply.  A Sara-Bay advisor would be happy to review the processes we use to measure performance.

 

The information in this article is a compilation pulled from a variety of sources.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

 

 

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