Performance Evaluation for Long-Term Value-Based Investors

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Performance Evaluation for Long-Term Value-Based Investors
Geoff Warren, Ph.D., Centre for International Finance and Regulation

An approach to performance evaluation is developed to support value-based investment programs where portfolios are formed based on long-term cash flow projections and expected returns. Performance is evaluated by attributing realized returns into components reflecting the initial expected return, changes in discount rates, changes in expected cash flows, and currency effects. The approach is designed to focus attention toward the key drivers of longterm returns when evaluating performance – cash flows generated by an asset over the long run, relative to the price paid – while de-emphasizing short-term price fluctuations that are unrelated to changes in long-term fundamental value. Application is illustrated by an example.

Performance Evaluation for Long-Term Value-Based Investors
Geoff Warren, Ph.D., Centre for International Finance and Regulation

An approach to performance evaluation is developed to support value-based investment programs where portfolios are formed based on long-term cash flow projections and expected returns. Performance is evaluated by attributing realized returns into components reflecting the initial expected return, changes in discount rates, changes in expected cash flows, and currency effects. The approach is designed to focus attention toward the key drivers of longterm returns when evaluating performance – cash flows generated by an asset over the long run, relative to the price paid – while de-emphasizing short-term price fluctuations that are unrelated to changes in long-term fundamental value. Application is illustrated by an example.

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