Portfolio performance measurement: theory and applications

Any admissible portfolio performance measure should satisfyfour minimal conditions: it assigns zero performance to eachreference portfolio and it is linear, continuous, and nontrivial.Such an admissible measure exists if and only if the securitiesmarket obeys the law of one price. A positive admissible measureexists if and only if there is no arbitrage. This article characterizesthe (infinite) set of admissible performance measures. It isshown that performance evaluation is generally quite arbitrary.A mutual fund data set is also used to demonstrate how the measurementmethod developed here can be applied.