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The New Wealth Management: The Financial Advisor's Guide to Managing and Investing Client Assets by Harold Evensky, Stephen M. Horan, Thomas R. Robinson, Roger Ibbotson

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CHAPTER 15

PERFORMANCE APPRAISAL AND EVALUATION

An ounce of performance is worth pounds of promises.

—Mae West

In the previous chapter, we discussed the idea of portfolio management in terms of equity, fixed income, and alternative investment strategies. The next chapter discusses the process of selecting investment managers. Whether the wealth manager constructs portfolios with individual securities, selects managers for separately managed accounts, or constructs portfolios with mutual funds, being able to measure, evaluate, and appraise portfolio performance is a critical component of portfolio construction monitoring described in the wealth management process in Chapter 1. Performance is ultimately measured by clients’ ability to meet their goals in a wealth management context, and sound portfolio management is a crucial step toward that end goal. Therefore, this chapter focuses on principles of portfolio performance measurement in the traditional sense.

MEASURING RETURN

The notion of measuring return seems straightforward. It is simply a portfolio’s change in value over a given period divided by its initial value in the period.

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MVt is the market value at the end of the evaluation period, while MV0 is the market value at the beginning of the evaluation period.1 The market value of the account should include all realized and unrealized capital gains, dividends and interest received, ...

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