Most investment and portfolio management texts discuss such basic measures of performance as the Sharpe ratio, the Treynor ratio, and Jensen’s alpha. These widely used criteria, however, represent only the tip of the iceberg in measuring performance. In Practical Portfolio Performance Measurement and Attribution, Carl Bacon, CIPM, provides the most complete and thorough reference work on performance measurement and attribution. This book takes the reader through the basic mathematics of portfolio return, risk, and benchmarks, including discussions of symmetrical and asymmetrical performance fees, as well as performance fee structure. With separate chapters on such neglected topics as multicurrency attribution, fixed-income attribution, and performance measurement for derivatives, Practical Portfolio Performance Measurement and Attribution is an invaluable reference for practitioners.
The measurement of performance has become an obsession in all walks of life. Countless performance rankings can be found in the media: Which individuals are on the Forbes list of richest people? Which company is atop the Fortune 500? Which television show had the highest ratings on Sunday evening?
Some performance rankings are easy to create because they measure a single dimension. In sports, for example, performance is usually based on only one attribute, such as speed, distance, or height. But exceptions do exist. In gymnastics, figure skating, and diving, rankings are based not only on the quality but also on the difficulty of the performance. In addition, decomposing the activity into distinct aspects, such as the dismount and landing component of a gymnast’s routine on the uneven parallel bars, can help improve an athlete’s future performance.
The measurement of portfolio managers’ performance resembles the evaluation of such athletes as gymnasts, figure skaters, and divers because at least two dimensions must be taken into account. Evaluating managers solely on return would ignore the critical factor of risk. Furthermore, focusing exclusively on return would not enable clients to assess performance on the basis of such components as market timing, security selection, and diversification.
Most investment and portfolio management texts discuss such basic measures of performance as the Sharpe ratio, the Treynor ratio, and Jensen’s alpha. These widely used criteria, however, represent only the tip of the iceberg in measuring performance. They are generally accepted measures of stock fund performance, but are they equally applicable to other financial products, such as derivatives, fixed-income securities, or funds that deal in multiple currencies?
In Practical Portfolio Performance Measurement and Attribution, Carl Bacon, CIPM, the chairman of StatPro, addresses these questions by providing the most complete and thorough reference work on performance measurement and attribution. In the book’s introduction, Bacon notes that he wrote the first edition so that he could have the book he had always wanted on the subject. He states that producing the second edition allowed him to make substantial additions and improvements that he omitted from the first edition because of time constraints.
Bacon begins by taking the reader through the basic mathematics of portfolio return, risk, and benchmarks. Benchmarking, together with the other topics, is a mainstay of investment texts, but Bacon pursues the topic further than others have by including discussions of symmetrical and asymmetrical performance fees, as well as performance fee structure. What really sets Practical Portfolio Performance Measurement and Attribution apart is its depth of coverage. Bacon includes separate chapters on such neglected topics as multicurrency attribution, fixed-income attribution, and performance measurement for derivatives.
The book consists of 11 chapters covering some 260 pages and more than 15 appendices spanning 100 pages. The book also includes a CD-ROM with Microsoft Excel spreadsheets that provide calculations for many of the tables. Bacon has a clear and concise writing style that makes his ideas highly accessible. Numerous examples keep the book from becoming merely a theoretical exposition and make Practical Portfolio Performance Measurement and Attribution a valuable resource for instructors of portfolio management.
Practical Portfolio Performance Measurement and Attribution may not be great bedtime reading, but it is to performance measurement and attribution what David Weiss’s classic, After the Trade Is Made: Processing Securities Transactions, is to back-office operations—an invaluable reference for practitioners.
—R.L.M.