Question

How do managers generate returns for their clients?

Can you please discuss referring to performance measures

Answer 1

How Managers Generates returns for their clients:

Managers will generates returns for the client by managing client's portfolio and by taking appropriate and meaningful decision while investing the wealth of client.

There are basically  three type of investor/client i.e.

1. Risk Neutral
2. Aggressive
3. Defensive

Managers have to decide what type of investor is willing to get their services of portfolio management and accordingly takes risk. For example- If an investor is aggressive then manager has to take high risk to generates high returns. but if, investor is defensive then managers should not take higher risk.

Managers has to take decision on following points while investing client's money:

1. Which Industry would be selected for investment
2. Which Company would be selected for investment
3. Weight of security in the portfolio shall be decided.
4. Whether to buy/sell/hold the security in the portfolio.
5. Extent up to which diversification is needed.
6. After investing in a particular portfolio, manager should also ascertain whether it needs any revision or not.

Performance Measures:

For the purpose of evaluating portfolio's performance we have a set of performance measure which is discussed as below:

1. Treynor's Ratio: It defines that, for every 1 time of Beta how much excess return (Over and above the risk free return) is generated by portfolio. Higher the treynor's ratio, Better is the performance.
2. Sharpe's ratio: It defines that, for every 1% of Standard Deviation how much excess return (Over and above the risk free return) is generated by portfolio. Higher the Sharpe's Ratio, Better is the Performance.
3. Jenson's Alpha: It evaluates portfolio on the basis of its return over and above the standard return on portfolio. Higher the Jenson's Alpha, Better is the Performance.

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