Introduction

Evaluation is a methodological area that is closely related to, but distinguishable from
more traditional social research. Evaluation utilizes many of the same methodologies used in
traditional social research, but because evaluation takes place within a political and
organizational context, it requires group skills, management ability, political dexterity, sensitivity
to multiple stakeholders and other skills that social research in general does not rely on as much.
Here we introduce the idea of evaluation and some of the major terms and issues in the field.
Definitions of Evaluation
Evaluation is the systematic assessment of the worth or merit of some object.
There are many types of evaluations that do not necessarily result in an assessment of
worth or merit -- descriptive studies, implementation analyses, and formative evaluations, to
name a few. Better perhaps is a definition that emphasizes the information-processing and
feedback functions of evaluation.
For instance, one might say:
Evaluation is the systematic acquisition and assessment of information to provide useful
feedback about some object.
Both definitions agree that evaluation is a systematic endeavor and both use the
deliberately ambiguous term 'object' which could refer to a program, policy, technology, person,
need, activity, and so on. The latter definition emphasizes acquiring and assessing information
rather than assessing worth or merit because all evaluation work involves collecting and sifting
through data, making judgements about the validity of the information and of inferences we
derive from it, whether or not an assessment of worth or merit results.
The Goals of Evaluation
The generic goal of most evaluations is to provide "useful feedback" to a variety of
audiences including sponsors, donors, client-groups, administrators, staff, and other relevant
constituencies. Most often, feedback is perceived as "useful" if it aids in decision-making. But
the relationship between an evaluation and its impact is not a simple one -- studies that seem
critical sometimes fail to influence short-term decisions, and studies that initially seem to have
no influence can have a delayed impact when more congenial conditions arise. Despite this, there
is broad consensus that the major goal of evaluation should be to influence decision-making or
policy formulation through the provision of empirically-driven feedback.
Portfolio Management
The art and science of making decisions about investment mix and policy, matching
investments to objectives, asset allocation for individuals and institutions, and balancing risk
against. performance.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice
of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs
encountered in the attempt to maximize return at a given appetite for risk

Meaning of portfolio evaluation

Portfolio evaluation refers to the evaluation of the performance of the portfolio. It is
essentially the process of comparing the return earned on a portfolio with the return earned on
one or more other portfolios or on benchmark portfolio. Portfolio evaluation essentially
comprises of two functions. Performance measurement and performance evaluation.
Performance measurement is an accounting function which measures the return earned on a
portfolio during the holding period or the investment period. Performance evaluation , on the
other hand, addresses such issues as whether the performance was superior or inferior ,whether
the performance was due to skill or luck, etc.
While evaluating the performance of a portfolio, the return earned on the portfolio has to
be evaluated in the context of the risk associated with that portfolio. One approach would be to
group portfolios into equivalent risk classes and then compare returns of portfolios within each
risk category. An alternative approach would be to specifically adjust the return for the riskiness
of the portfolio by developing risk adjusted return measures and use these for evaluating
portfolios among different risk levels
Literature on mutual fund performance evaluation is enormous. A few research studies
that have influenced the preparation of this paper substantially are discussed in this section.
Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance.
Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has
suggested a new predictor of mutual fund performance, one that differs from virtually all those
used previously by incorporating the volatility of a fund's return in a simple yet meaningful
manner.
In the case of mutual funds the rate of return earned by different mutual funds or mutual
fund schemes may be calculated and compared with the rate of return earned by representative
stock market index which can be used as benchmark for comparative evaluation. The mutual
funds may also be ranked in descending order of their rates of return. But such a straight forward
rates of return comparison may be incomplete and sometimes even misleading. The differential
return earned by mutual funds could be due entirely to the differential risk exposure of funds.
Hence the returns have to be adjusted for risk before making any comparison.

Evaluation perspective
A portfolio comprises several individual securities .In the building up of the portfolio several
transactions of purchase and sale of securities take place. Thus, several transactions in several
securities are needed to create and revise a portfolio of securities. Hence, the evaluation may be
carried out from different perspective or viewpoints such as a transactions view, security view or
portfolio view.
A. Transaction view
An investor may attempt to evaluate every transaction of purchase and sale of
securities, whenever a security is bought or sold, and the transaction is evaluated as regards its
correctness and profitability
B. Security view
Each security included in portfolio has been purchased at a particular price. At the
end of the holding period , the market price of the security may be higher or lower than its cost
price or purchase price. Further, during the holding period, interest or dividend might have been
received in respect of the security. Thus , it may be possible to evaluate the profitability of
holding each security separately. This is evaluation from the security viewpoint.
C. Portfolio view
A portfolio is not a simple aggregation of a random group of securities. It is a
combination of carefully selected securities, combined in a specific way so as to reduce the risk
of investment to the minimum. An investor may attempt to evaluate the performance of the
portfolio as a whole without examining the performance of individual securities within the
portfolio. This is evaluation from the portfolio view.
Though evaluation may be attempted at transactional level or security level, such evaluation
would be incomplete, inadequate and often misleading .Investment is an actively involving risk.
Proper evaluation of the investment activity must, therefore, consider return along with risk
involved .But risk is the best defined at the portfolio level and not at the security or transactional
level. Hence ,the best perspective for evaluation is the portfolio view.

Different Ways to Evaluate of the Portfolios Performance

#1
Review your present net worth and particularly, the value of your investment portfolio
regularly. This is something youll want to try to do periodically. Keep up with your accounts
at your discount broker, bank or mutual fund company. I know some finance bloggers who do
it on a monthly basis, but every three to six months may be sufficient for your regular net
worth check ups. Knowing where you stand is the first step to gauging how well youre doing
overall.
#2
Check how your portfolio is doing against its benchmarks. With the markets, everything
Is relative. Youre doing very well if youre investments are performing at least as well as
their respective indexes. Check each of the asset classes that are represented in your portfolio
and see how theyre doing against their comparative index and if there are discrepancies,
figure out why! Those prospectuses, fund/company stock reports and investment performance
reviews that come by your home or online inbox every few months are quite handy because
they explain what the deal is with your holdings.
Example, if your whole portfolio is primarily invested in US equities, see if its doing at least as
well as the Total Stock Market Index, which tracks the entire market; or the Wilshire 5000, as
represented by their ETFs. If somethings not quite right, you may want to make adjustments.
Check the performance of stock market indexes here, or take a look at their corresponding ETFs.
#3
Compare the individual investments in your portfolio against their peers in the same asset
class. Each of your funds or stocks is part of a bigger universe of like investments. Id suggest
comparing how your individual fund or stock is behaving relative to other funds or stocks that
are in the same industry or sector. Youll have to be careful about comparing apples to apples
though, but if you note some glaring differences or a pattern of underperformance, it may be
time to do some switching.
#4
Ensure that your investments remain on target according to your established goals.
Evaluate how each investment is doing and confirm its place in your overall plan. Since our
lives shift and turn with the years, it is also quite possible that our investments may need to be
revisited and perhaps adjusted accordingly. An example of this just happened to my family
recently when we decided to temporarily function with only one income for the time being.
The job loss we experienced and subsequent plans for starting a business have turned us into
more conservative investors, relative to how we used to be. We thus put our interest in some
aggressive investments on hold while we navigate this new life phase.
#5
Make the necessary updates and tweaks to your portfolio on a regular basis. If need be,
actually take action and do the necessary work to readjust your portfolio. If your portfolio
has shifted from its desired allocation, or your life plan has put a monkey wrench on your
financial picture, then make the changes. Sometimes, its not even your choice to make
adjustments as in the case of one of my 401K plan providers forcing a termination of their
service. This forces me to roll over my funds to a Rollover IRA, which was what I had wanted
to do for a while but didnt, due to sheer procrastination. Now, I just have to roll up my
sleeves and do it.

Capital Asset Pricing Model - CAPM

Meaning
A model that describes the relationship between risk and expected return and that is used
in the pricing of risky securities.

The general idea behind CAPM is that investors need to be compensated in two ways:
time value of money and risk. The time value of money is represented by the risk-free (Rf) rate
in the formula and compensates the investors for placing money in any investment over a period
of time. The other half of the formula represents risk and calculates the amount of compensation
the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta)
that compares the returns of the asset to the market over a period of time and to the market
premium (Rm - Rf).
ADVANTAGES OF THE CAPM
The CAPM has several advantages over other methods of calculating required return,
explaining why it has remained popular for more than 40 years:
o It considers only systematic risk, reflecting a reality in which most investors have diversified
portfolios from which unsystematic risk has been essentially eliminated.
o It generates a theoretically-derived relationship between required return and systematic risk
which has been subject to frequent empirical research and testing.
o It is generally seen as a much better method of calculating the cost of equity than the
dividend growth model (DGM) in that it explicitly takes into account a companys level of
systematic risk relative to the stock market as a whole.
o It is clearly superior to the WACC in providing discount rates for use in investment appraisal.
DISADVANTAGES OF THE CAPM
The CAPM suffers from a number of disadvantages and limitations that should be noted
in a balanced discussion of this important theoretical mode Assigning values to CAPM variables
In order to use the CAPM, values need to be assigned to the risk-free rate of return, the return on
the market, or the equity risk premium (ERP), and the equity beta. The yield on short-term
Government debt, which is used as a substitute for the risk-free rate of return, is not fixed but
changes on a daily basis according to economic circumstances. A short-term average value can
be used in order to smooth out this volatility.

Means of Portfolio Evaluation

The most important and widely used measures of performance are:
Treynor Ratio
Meaning

A ratio developed by Jack Treynor that measures returns earned in excess of that which
could have been earned on a riskless investment per each unit of market risk.
The Treynor ratio is calculated as:
Treynor ratio =

Rp Rf
p

(Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Portfolio
Sharpe Ratio
Meaning

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted

performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the
10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the
standard deviation of the portfolio returns. The Sharpe ratio formula is:
Sharp ratio =

Rp Rf
p

(Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Standard Deviation of the Portfolio

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavourable performance.
Jensen Ratio
The Jensen Ratio provides an estimate of excess return relative to what is predicted by
CAPM. This is also the alpha of the security characteristic line. is generated from
regressions. We can also define other related measures such as the appraisal ratio: alpha relative
to the portfolios diversifiable risk
2.2.2 Meaning of portfolio evaluation
Portfolio evaluation refers to the evaluation of the performance of the portfolio. It is
essentially the process of comparing the return earned on a portfolio with the return earned on

one or more other portfolios or on benchmark portfolio. Portfolio evaluation essentially

comprises of two functions. Performance measurement and performance evaluation.
Performance measurement is an accounting function which measures the return earned on a
portfolio during the holding period or the investment period. Performance evaluation , on the
other hand, addresses such issues as whether the performance was superior or inferior ,whether
the performance was due to skill or luck, etc.
While evaluating the performance of a portfolio, the return earned on the portfolio has
to be evaluated in the context of the risk associated with that portfolio. One approach would be to
group portfolios into equivalent risk classes and then compare returns of portfolios within each
risk category. An alternative approach would be to specifically adjust the return for the riskiness
of the portfolio by developing risk adjusted return measures and use these for evaluating
portfolios among different risk levels
Literature on mutual fund performance evaluation is enormous. A few research
studies that have influenced the preparation of this paper substantially are discussed in this
section. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio
performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L.
Treynor has suggested a new predictor of mutual fund performance, one that differs from
virtually all those used previously by incorporating the volatility of a fund's return in a simple yet
meaningful manner.
The first step in portfolio evaluation is calculation of rate of return earned over the
holding period. Return may be defined to include changes in the value of the portfolio over the
holding period plus any other income earned over the period.
In the case of mutual funds the rate of return earned by different mutual funds or
mutual fund schemes may be calculated and compared with the rate of return earned by
representative stock market index which can be used as benchmark for comparative evaluation.
The mutual funds may also be ranked in descending order of their rates of return. But such a
straight forward rates of return comparison may be incomplete and sometimes even misleading.
The differential return earned by mutual funds could be due entirely to the differential risk

exposure of funds. Hence the returns have to be adjusted for risk before making any comparison.

A) The Sharpe Measure

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio,
which is a ratio of returns generated by the fund over and above risk free rate of return and the
total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors
are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk.
Symbolically, it can be written as:
Sharpe Index (Si) = (Ri - Rf)/Si
Where, Si is standard deviation of the fund.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a
low and negative Sharpe Ratio is an indication of unfavourable performance.

B) The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis
of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free
rate of return (generally taken to be the return on securities backed by the government, as there is
no credit risk associated), during a given period and systematic risk associated with it (beta).
Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund.
All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative
Treynor's Index is an indication of unfavourable performance.
Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are evaluating the
risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is
the relevant measure of risk when we are evaluating less than fully diversified portfolios or
individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk.
Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be
identical for a well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore,
a poorly diversified fund that ranks higher on Treynor measure, compared with another fund that
is highly diversified, will rank lower on Sharpe Measure.
C) Jenson Model
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the Differential Return Method.
This measure involves evaluation of the returns that the fund has generated vs. the returns
actually expected out of the fund given the level of its systematic risk. The surplus between the
two returns is called Alpha, which measures the performance of a fund compared with the actual
returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated
as:
Ri = Rf + Bi (Rm - Rf)
Where, Rm is average market return during the given period. After calculating it, alpha can be
obtained by subtracting required return from the actual return of the fund.
Higher alpha represents superior performance of the fund and vice versa. Limitation of
this model is that it considers only systematic risk not the entire risk associated with the fund and
an ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is primitive.

Franklin India Prima Plus

Launched in September 1994 by Kothari pioneer ,which was acquired by Franklin Templeton
Asset Management Company. Franklin India Prima Plus is one of the oldest funds in India. The
scheme aims to provide growth of capital and regular dividend from a portfolio of equity, debt
and money market instruments and focusing on wealth creating companies across all sectors and
market cap ranges. With over 17000 crore of Asset Under Management the fund is diversified
with an average of 60 stocks in its portfolio at any given time. While the fund has favoured
financial services companies for quite some times now, it is now gradually begun to built up the
portfolio of energy stocks since October 2008.
Returns of Franklin India Prima Plus

2005 2006
Table 4.3B

2007

2008

2009

calculation of standard deviation

Year

Return: Franklin India (X)

2009

73.10

5343

2008

-47.71

2276

2007

54.90

3014

2006

49.36

2436

2005

47.61

2266

TOTAL

X =177.26

X =15335

Standard Deviation

(X)

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S.D

= 42.54

=
.

Calculation of risk free return for 5 years

Year

Risk free return

2006

6.25

2007

8.25

2008

9.50

2009

7.00

2010

6.50

Total

37.5

For calculating risk free return we select average of reserve banks fixed interest rates
Risk free return for 5 years = 37.5/5 = 7.5

Statistical Measures
Particulars

Value

Average Return

35.45

Risk free return

7.5%

BETA

.90

Standard Deviation

42.54

Sharpe ratio of Franklin India Prima Plus

Sharp ratio =

Rp Rf
p

For calculating Sharpe ratio of Franklin India Prima Plus we take return of the portfolio (Rp) as
the average return for the last Five years(2005 - 2009)
35.45 - 7.5
Sharpe ratio = --------------42.54

= 0.65

B. Treynor ratio of Franklin India Prima plus

Treynor ratio =

Rp Rf
p

For calculating Treynor ratio of Franklin India Prima plus , we take return of the portfolio (Rp)
as the average return for the last five years(2005 - 2009)
Treynor ratio = 35.45-7.5
0.90

=31.05

Franklin India performed well in last five years. Its reward to variability ratio is .65.Franklin
Indias major share is in financial sector. It help them to earn good returns in the current rally.
Franklin Indias reward to volatility ratio is 31.05. so it is well performed to overcome
systematic risk also. Till the meltdown Franklin India is an average performer. In meltdown the
fund is got success in minimizing losses as compared by BSE Sensex. But in current bull run it
become failure to earn benefits up to BSE Sensex. The funds performance record aptly
substantiates its tendency to do well in down turns than rallies

HDFC Prudence Fund

HDFC Prudence is a balanced fund. Yet its returns ,particularly in the recent past
,have surpassed even those of a broader market indices-the Sensex and the nifty.HDFC Prudence
was launched in January 1994.It is one of the oldest equity oriented hybrid fund of the country
today. Its humungous asset size of over Rs 3200crore also makes it the largest and the most
popular schemes in the category of balanced funds. The scheme seeks periodic returns and longterm capital appreciation from a balanced portfolio of debt and equity.

Returns of HDFC Prudence

2005

2006

2007

2008

2009

Calculation of standard deviation

Year

Return: HDFC Prudence (X)

(X)

2009

84.84

7198

2008

-42.00

1764

2007

43.00

1849

2006

33.00

1089

2005

47.00

2209

TOTAL

X =165.84

X =14109

Standard Deviation

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= 41.49
40000002701ffff030000000000
Calculation of risk free return for 5 years
Year

Risk free return

2006

6.25

2007

8.25

2008

9.50

2009

7.00

2010

6.50

Total

37.5

For calculating risk free return we select average of reserve banks fixed interest rates
Risk free return for 5 years = 37.5/5 = 7.5
Statistical Measures
Particulars

Value

Average return

33.16

Risk free return

7.5%

BETA

1.07

Standard Deviation

41.49

A. Sharpe ratio of HDFC Prudence

Sharp ratio =

Rp Rf
p

For calculating Sharpe ratio of HDFC Prudence we take return of the portfolio (Rp) as the
average return for the last Five years (2005 - 2009)
Sharpe ratio
=33.16-7.5 = .61
41.49

B Treynor ratio of HDFC Prudence

Treynor ratio =

Rp Rf
p

For calculating Treynor ratio of HDFC Prudence, we take return of the portfolio (Rp) as the
average return for the last five years (2005 - 2009)
Treynor ratio = 33.16-7.5
1.07

=23.98

HDFC Prudence is a balanced fund. Its reward to variability ratio is .61.As far as a balance fund
is concerned its Sharpe ratio is very high. It shows the superior performance of the fund. Its
reward to volatility ratio is 23.98. when compared to other funds its beta(un is little high.
because of the balanced nature of this fund.. so the reward to volatility ratio is little low. But a
balance fund is concerned HDFC Prudence outperformed in last five years

Sundaram BNP Paribas SMILE

Sundaram BNP Paribas SMILE has rewarded many of its investors who chose to stay with the
funds irrespective of market conditions .SMILE(Small and Medium Indian Leading Equities
Fund),as the name suggests invest in small and mid caps stocks and has emerged as one of the
leading funds in this category during its five year long performance history. While around 40 per
cent of its investment universe comprises of stocks that have been held in the portfolio for less
than six months, there are a number of stocks which have been held for considerable lengths of
time. Its worth noting that in most stocks it offloads positions completely before buying them
afresh.
Returns of Sundaram BNP Paribas SMILE

2006

2007

2008

2009

Calculation of standard deviation

Year

Return: Sundaram BNP SMILE (X) (X)

2009

120.44

14505

2008

-57.62

3320

2007

81.17

6588

2006

30.92

956

TOTAL

X =174.91

X =25369

Standard Deviation

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= .66.55

Calculation of risk free return for 4 years

Year

Risk free return

2007

8.25

2008

9.50

2009

7.00

2010

6.50

Total

31.25

For calculating risk free return we select average of reserve banks fixed interest rates
Risk free return for 4 years = 31.25/4 = 7.81

Statistical Measures
Particulars

Value

Average return
Risk free return
BETA

43.72
7.81%
1.18

Standard Deviation

66.55

A. Sharpe ratio of Sundaram BNP Paribas SMILE

Sharp ratio =

Rp Rf
p

For calculating Sharpe ratio of Sundaram BNP Paribas SMILE we take return of the portfolio
(Rp) as the average return for the last Four years (2006 - 2009)
Sharpe ratio = 43.72-7.81
66.55 = 0 .54

B Treynor ratio of Sundaram BNP Paribas SMILE

Treynor ratio =

Rp Rf
p

For calculating Treynor ratio of Sundaram BNP Paribas SMILE,

we take return of the

portfolio (Rp) as the average return for the last four years (2006- 2009)

Treynor ratio = 43.72-7.81

1.18 = 30.43

The reward to volatility ratio of Sundaram BNP SMILE is .66. it shows funds superior and high
performance. Its major investments in small and mid cap companies. It increases the total risk of
the portfolio. But its Sharpe ratio indicates the strong management of assets by the fund
managers. In the current year its return is above 100%.its reward to volatility ratio is also good.
Its Treynor ratio is 30.43.Given its midcap orientation Sundaram BNP SMILE has done
exceptionally wee during in last five years

Alpha of the portfolio is Return on portfolio minus Capital Asset Pricing Mode.