The Upside Potential Strategy: A Paradigm Shift in Performance Measurement
- Topics:
- Commercial Lending
- Tags:
- Capital Asset Pricing Model,
- Human Resources,
- Investor,
- PCT Publishing,
- Performance,
- Performance Management,
- Strategy,
- Workforce Management
- Source:
- PCT Publishing
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Overview: The thesis of this paper is that popular performance measures, like the Sharpe ratio and information ratio, are not designed for the clients needs. The “one size fits all” approach of these ratios does not recognize the fact that the clients have different ages, different amounts of wealth and different goals. It proposes a new two-step procedure for performance measurement that is designed to help the individual investor accomplish his or her goals. The Sharpe ratio and Information ratio are derived from the Capital Asset Pricing Model (CAPM). The CAPM explains how all assets should be priced in equilibrium so that, on a risk-adjusted basis, all returns are equal. This implies that everyone has the same goal: beat the market. The CAPM is designed to solve the investment problem for all investors, simultaneously. It is not designed to solve the investment problem of an individual investor, like the client. Each of the clients has some rate of return that must be earned at minimum in order to accomplish their goal. If that minimal acceptable return (MAR) is not in the equation, it cannot be measuring performance relative to the client’s goal.
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Format: PDF | Size: 940KB | Date: Jan 2003 | Pages: 6
