RISK, THE PRICING OF CAPITAL ASSETS, AND THE EVALUATION OF INVESTMENT PORTFOLIOS (2)

The main purpose of this study is the development of a model for evalu­ating the performance of portfolios of risky assets. In evaluating the per­formance of portfolios the effects of dif­ferential risk must be taken into con­sideration.1 If investors are generally averse to risk, they will prefer (ceteris pa-Hbus) more certain income streams to less certain streams. Under these conditions investors will accept additional risk only if they are compensated for it in the form of higher expected future returns. Thus, in a world dominated by risk-averse investors, a risky portfolio must be expected to yield higher returns than a less risky portfolio, or it would not be held. The portfolio evaluation model devel­oped below incorporates these risk as­pects explicitly by utilizing and extend­ing recent theoretical results by Sharpe [52] and Lintner [37] on the pricing of capital assets under uncertainty. Given these results, a measure of portfolio "per­formance" (which measures only a man­ager's ability to forecast security prices) is denned as the difference between the actual returns on a portfolio in any par­ticular holding period and the expected returns on that portfolio conditional on the riskless rate, its level of "systematic risk," and the actual returns on the mar­ket portfolio. Criteria for judging a port­folio's performance to be neutral, superior, or inferior are established. Read Full Text at http://us.share.geocities.com/iklan_aja/Michael.C.pdf