CAPITAL ALLOCATION AND PERFORMANCE MEASUREMENT

Capital allocation based on the performance of the portfolio is an import aspect in investor gaining a good profit. Most of the investor considers only the return that they yield out of the portfolio; however there might be some asset in the portfolio which performs extremely well and those which performs very badly. It is important to increase the high yielding asset and remove the loss making asset from the portfolio. It must be noted that even the risk must be taken into consideration while calculating the performance of the asset. It is therefore important to measure the performance of the asset quite regularly.

 There are three tools to measure the performance of the asset they are,

• Treynor measure is the first model that tries to find a relationship between risk, return etc. Treynor ultimate aim is to find a formula using which the relationship between risk and the return can be found out to the entire asset. Treynor introduced a concept called security market line; it is nothing but the process of finding out a relationship between the fluctuation in the market and the impact on the security. In other word the level to which the security reacts to the fluctuation in the market.
• Sharpes Ratio is almost similar to Treynor measure. The systematic risk is measured in Sharpes model in the form of standard deviation , whereas in Treynor it is followed using a formula beta.
• Jensen measure is a model in which CAPM model is used as a base model.  In this model the risk factor is denoted as alpha. Jensen assumes that the portfolio return is hugely related to the efficiency of the manager. In Jensen model the continuous positive return will yield positive alpha whereas the continuous negative return will yield negative alpha.

 It is important for the portfolio managers to analyze the performance of each and every asset in the portfolio. It increases the efficiency of the portfolio if each asset performance is monitored. The performance of the asset can be increased by removing the bad asset and increasing the good performing asset in the portfolio.