Loan advice

The measurement and evaluation of investment performance is the last step in the investment management process. Actually, it is misleading to say that it is the last step since the investment management process is an ongoing process. This step involves measuring the performance of the portfolio and then evaluating that performance relative to some benchmark.
Although a portfolio manager may have performed better than a benchmark, this does not necessarily mean that the portfolio manager satisfied the client’s investment objective. For example, suppose that a financial institution established as its investment objective the maximization of portfolio return and allocated 75% of its funds to common stock and the balance to bonds. Suppose further that the manager responsible for the common stock portfolio realized a 1-year return that was 150 basis points greater than the benchmark. Assuming that the risk of the portfolio was similar to that of the benchmark, it would appear that the manager outperformed the benchmark. However, sup- pose that in spite of this performance, the financial institution cannot meet its liabilities. Then the failure was in establishing the investment objectives and setting policy, not the failure of the manager.