Portfolio Performance Measurement › Portfolio Performance Measurement

Constructing a portfolio is only half the challenge in quantitative finance. The other half is answering a deceptively simple question: how well did it perform? Raw returns tell an incomplete story. A fund that gained 20% sounds impressive until you learn it took on three times the market's risk to achieve it, or that it suffered a 50% loss along the way before recovering. Portfolio performance measurement provides the analytical framework to evaluate investment results rigorously, accounting for the risk taken, the benchmark against which performance should be judged, and the path returns took to reach their final value.

This chapter develops the core metrics used by portfolio managers, allocators, and risk officers to assess investment performance. Building on the mean-variance framework from our discussion of Modern Portfolio Theory and the factor models introduced with CAPM and APT, we now turn to measuring how well these theoretical constructs translate into realized results. You'll learn to compute risk-adjusted returns using the Sharpe and information ratios, quantify downside risk through maximum drawdown and the Calmar ratio, and properly benchmark active strategies against their relevant indices. These tools support both past performance evaluation and forward-looking allocation decisions.