Portfolio Rate Of Return

It is the weighted average return of all form of return in a portfolio.  It is usually used in the insurance company, mutual fund. The insurance company, mutual fund use this method to determine the rate of return. The insurance companies, mutual fund uses this method because their investment contains variety of asset, right from bond, estates, securities etc. The investor use this portfolio rate of return to make investment based on it.

 Jack L Treynor was the first person to provide a method to find the return from the portfolio. This is used to determine the performance of the portfolio. According to him there are two forms of risk they are risk associated with market and risk associated with each stock in the portfolio. Treynor tried to find out a relation between the performance of the market and the performance of the portfolio and this concept is called as security market line.  The relation ship between the fluctuation in the market and the fluctuation in the portfolio is expressed as β.

The disadvantage in the treynor method is that the risk associated with the portfolio is not taken into consideration, this lead to the Sharpe’s model. In this model the risk associated with each portfolio is also taken into consideration. The sharp’s model is given by Bill Sharpe’s

It is know that different portfolio yields different return, it is therefore necessary to find the return on each portfolio in order to make decision on investment. Rate of return will vary with time period as well. Port folio rate of return are identified for each portfolio and then investor invest in the portfolio that yields the maximum return. Investor must keep in mind that it is mainly a tool to determine the rate of return. The rate of return from portfolio may not be the same as the calculated value. The portfolio is subjected to many fluctuations in the market which cannot be included in the mathematical calculation of the portfolio return.

The portfolio contains many individual stocks in it. A high fluctuation on a single stock in a portfolio can have a huge impact in the complete portfolio. It is there fore necessary to keep track of the individual but effective stock in a portfolio.