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Equity portfolio evaluation is a critical process in bank financial management, as it helps assess the performance, risk, and efficiency of investments. The objective is to ensure that the equity investments align with the risk-return profile and strategic goals of the bank. A range of analytical tools are used for this evaluation, each providing unique insights into different aspects of portfolio performance. The major tools include Sharpe Ratio, Treynor Ratio, Jensen’s Alpha, Beta, R-squared, Standard Deviation, Value at Risk (VaR), and Tracking Error. 1. Sharpe Ratio The Sharpe Ratio, developed by William F. Sharpe, measures the risk-adjusted return of a portfolio. It is calculated by subtracting the risk-free rate from the portfolio return and dividing the result by the portfolio’s standard deviation. Formula: Sharpe Ratio = (Rp - Rf) / σp Where Rp = Portfolio return, Rf = Risk-free rate, σp = Standard deviation of portfolio returns Advantages: * It considers total risk (standard deviation), making it suitable for portfolios that are not fully diversified. * Simple to calculate and widely understood. * Helps compare portfolios with different levels of risk. Drawbacks: * Assumes returns are normally distributed, which may not be true for all portfolios. * Sensitive to the choice of the risk-free rate. * Penalizes both upside and downside volatility equally, which might not align with _________ ______ __________ _______ ____ _______ ___ __________.
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