This book describes and demonstrates the techniques we use to measure investment performance.
Performance measures are statistics summarizing the rates of return achieved, estimates of the risk taken, and measures of the skill evidenced by the efficient use of risk. Once we have measured performance we are interested in measuring the contributions made by the securities, industries, asset classes, and other portfolio segments to the absolute and benchmark relative returns achieved. Together the returns and the insight gained as to how the returns were attained help foster the next round of asset allocation, manager selection, and security selection decisions. These decisions form a recurring investment cycle as the process starts again with the insight gained from the historical analysis, reevaluation of our future needs, and evaluation of the prospective opportunities.

Whether we are in the role of individual or institutional investor, delegate our investment decision making to others, or responsible for managing the portfolios, we are all interested in weighing the results of our activities. Historical risk and return statistics help form our expectations for future expected risk and return that we use in the process of constructing efficient portfolios. As investors, our goals for capital growth, income, and liquidity have to be synchronized with the realities presented by the capital markets, our abilities to select good managers, and the manager’s ability to produce excess returns over time.