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Evaluation of performance in 2009

It is significative for this report to evaluate the performance of portfolios for the subsequent year – 2009—so as to see the validity and application of those methodologies.

After allocating funds according to the weights obtained above, we will have 3 portfolios at the beginning of the year 2009. Until the end of the year, the 3 complete portfolios generated from value-weighted, Markowitz and TB strategies have been witnessed different performances. The risk return profile, sharp ratio and Jensen’s alpha measurement data for the 3 portfolios in 2009 are presented in table 13.

In general, all three portfolios have positive returns in 2009. The Markowitz portfolio has the lowest sharp ratio whereas TB and Value-weighted portfolios are quite similar to each other. This result contradicts to the conclusion obtained in the last section using historical data for the measurement of portfolio performance.

From the perspective of Jensen measure, all three alphas are statistically insignificant, indicating that no superior returns are realized in the portfolios. Hence, although the evaluation based on historical data in the last section has detected superior performance for all three portfolios, when applying the weights to the following year, the portfolios will perform just as expected.

The contradiction of conclusions regarding the performance of different portfolios can be attributed to the use of historical data as approximation of market expectancy. Specifically, applying historical data as estimates of future may exert risk to the portfolios. To illustrate, returns obtained from historical data may be upward biased by the survivorship bias. Moreover, changing nature of the environment prevent estimates from historical data fully reflecting market expectancy towards future. Conditioning information also cannot be captured by historical returns, leading to imprecise estimation.

总结-Conclusion

So far, the process and expertise of portfolio management has been presented in the report, accompanied by an in-depth analysis regarding different portfolio construction methodologies. I believe that a portfolio manager, who is capable of understanding the portfolio management process, taking advantage of all the relative techniques while keeping in mind all the potential risks, is prepared to succeed in his career.
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