Portfolio Evaluation 🧐📊

You've built your portfolio, waited for a year, and now you see a 15% return. Is that good? Or is it bad? Portfolio Evaluation is the process of answering that question by looking at the results in the context of risk and the market.

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1. The Three Steps of Evaluation

Evaluation isn't just one number; it's a three-step process:

1. Performance Measurement: Calculating the actual return and risk of the portfolio.
2. Performance Comparison: Comparing your results to a "Benchmark" (like the Nifty 50) and to other similar portfolios.
3. Performance Attribution: Understanding why the performance was good or bad (Was it good stock picking? Or just good timing?).

2. Why Evaluate?

• To Check Progress: Are you on track to meet your long-term financial goals?
• To Judge Managers: If you paid a mutual fund manager a fee, did they actually beat the market, or would you have been better off in a simple index fund?
• To Identify Weakness: Which part of your portfolio is dragging down the overall performance?

3. The Need for Risk-Adjustment

A 20% return is great, but if it was achieved by taking 50% more risk than the market, it might actually be a "bad" performance.

• Key Concept: Performance must always be measured on a Risk-Adjusted Basis.

Summary

• Portfolio Evaluation is about judging performance, not just measuring it.
• It requires Comparison with a relevant benchmark.
• It focuses on Risk-Adjusted Returns.
• It is the "Quality Control" stage of the investment process.

Quiz Time! 🎯

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