Abstract

The literature of investment management has dealt effectively with the analysis of portfolio performance and evaluation of investment managers, but it has not focused directly on the validity of investment decision making. Since investment decisions are frequently subjective and consist of a complex mix of security analysis, market analysis, economic factors, and investment skill, their effectiveness can be measured only indirectly through measures of portfolio performance. The author describes a stock-selection model that is used for security analysis and portfolio management and compares portfolios selected by the model with benchmark portfolios. For valid comparisons between the market and a portfolio, market return and risk must be estimated, and the buy-hold portfolio provides the necessary information for this purpose when ex-post portfolio performance is being evaluated. Return is the growth rate that must be achieved or the yield that must be earned to make the market or a portfolio grow from some initial value to its value at the end of the period under study.