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Portfolio Performance Measurement: Traditional vs Utility-Based Approaches

The present article discusses the role of traditional and utility-based approaches in constructing risk-adjusted performance measures. In order to facilitate investor profiling and portfolio assessment we introduce a piecewise-linear utility framework. To model an investor profile, we build an approximation to the possibly non-linear utility curve, identifying its flex points and finding respective slopes between them under the assumption of discretely changing marginal utility. To estimate portfolio performance, we introduce such indicators as Perceived Gain Potential, Perceived Downside Risk and Expected Utility of Return. Verification results show model consistency with management quality and portfolio risk estimates as well as its high selective ability under imperfect capital markets.