Classics in Investment Performance Measurement is, as the title suggests, a collection of academic research papers about the measurement of investment performance. The book contains 23 papers, 20 of which originally appeared in four journals: the Journal of Performance Measurement, the Journal of Finance, the Financial Analysts Journal, and the Journal of Portfolio Management. The remaining three are republished from the Harvard Business Review, the Journal of Business, and the American Economic Review.

The book includes papers that introduced such now-standard performance metrics as the Treynor ratio, the Sharpe ratio, and Jensen’s alpha, as well as Eugene Fama’s methodology for decomposing portfolio return, together with more recent papers that discuss performance measurement of foreign currency and derivatives. It is thoughtfully edited by David Spaulding, president of the Spaulding Group and editor of the Journal of Performance Measurement, and James A. Tzitzouris, Jr., a vice president with T. Rowe Price.

Spaulding and Tzitzouris divide their subject into three sections: measuring performance, adjusting it for risk, and attributing it to such components as asset allocation and security selection. Classics in Investment Performance Measurement provides each paper’s original abstract or, where none was available, a new one written by the editors. In addition, each section is preceded by an editorial introduction that discusses the papers and explains the reasons for their inclusion. The introductions contain the occasional mangled sentence that is inexcusable but nonetheless deplorably common in finance books issued by the nonmajor publishers. An example is, “Note that time linking is only a problem for arithmetic attribution methodologies; under geometric attribution.” Another one is, “This attributed to country allocation and security selection decisions.” Substantively, however, the introductions are sound and informative.

The book’s true value, of course, lies in the papers themselves. As one reads through them, two principles of research come to mind. The first is Lord Kelvin’s motto, carved into the Social Science Research Building at the University of Chicago: “When you cannot measure, your knowledge is meager and unsatisfactory.” The second is that the most thorough research involves primary rather than secondary sources. For example, Jack L. Treynor, a former editor of the Financial Analysts Journal, has disavowed authorship of the ratio that bears his name because its use of beta in the denominator captures systematic rather than total risk. By reading the relevant papers by Treynor and William F. Sharpe, one learns that the latter named the ratio after Treynor.

All in all, these papers constitute a terrific introduction to the measurement of investment performance. The editors have done the investment profession a service by making them available in a single volume. Although Classics in Investment Performance Measurement may not need to be on the shelf of every investment professional, it definitely belongs in the research library of every investment management firm.

—J.H.T.