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Abstract Since achieving investment goals is the basic aim of the investment process, an explicit statement of these goals is a critical step in the evaluation of the process. The three major aspects of evaluating the performance of a hypothetical portfolio First we would want to determine whether our overall asset distribution (allocation) was effective in meeting-the longer term real rate of return objectives. Second, we would want to assess the productivity of any changes in the weightings of the asset allocation from its longer run target; that is, we need to determine the incremental gain or loss from weighting the various asset classes differently than for the longer run objective. Finally, we would want to analyze whether the managers of the differing asset categories domestic equities, international equities, and fixed income securities were performing relatively better or worse than the appropriate benchmark for the category. - A second dimension to analyze in appraising the performance of a fund is to assess the productivity of any changes in the weighting of the asset from the longer run target asset allocation, hi particular, we would be interested in assessing to what extent the fund has shifted classes, from the longer term target weightings and then measure the effect of those shifts on performance. - The third dimension to performance evaluation is assessment of the success of managers within individual asset classes: domestic equity, international equity, and fixed income securities. In making this comparison we are essentially trying to evaluate the ability of the manager or managers to make individual security and industry selections. There are three types of comparisons: (1) with a market index, (2) with the performance of others specializing in the management of securities within the asset class, and (3) evaluation based on measurements of risk adjusted return derived from the risk return framework. - Managers should be concerned with monitoring the exposure of the portfolio to market effects to determine whether the portfolio positioning is consistent with longer run policy targets or is appropriate for current market conditions. For example, if the outlook for the market were judged to be especially favorable, the manager might well desire to take advantage of this by rising the portfolio beta above its current level. Conversely, if the forecast were for a declining market, the appropriate strategy would be to lower the beta from its current level. Finally, if the manager were uncertain of the direction of the market and wished to hedge against this uncertainty, then the appropriate strategy would be to keep the portfolio beta in line with the market beta. - In addition, it is important that the manager evaluate the exposure of the portfolio to the group component to determine whether the positioning in growth, cyclical, stable. and energy stock is appropriate for current market conditions. There may be periods when an individual group is judged to be particularly attractive, and the manage/ may desire to weight it more heavily in the portfolio |