Portfolio management and performance evaluation

Section 4 of Module 12 can supply up to 20% of the paper. It mixes concept items on market efficiency, security analysis and the investment policy statement with short calculations: the Sharpe, Treynor and information ratios, Jensen's alpha, M², tracking error, time-weighted and money-weighted returns, and rebalancing a drifted portfolio. Wrong options are built from mixing up the risk measure (σ, β or tracking error), forgetting the risk-free rate, reversing the nesting of the efficiency forms, or calling liquidity and time horizon objectives rather than constraints.

7 min read6 sections

Checked 12 October 2026 against Bodie, Kane and Marcus, Investments (chapters on the efficient market hypothesis, technical analysis, investment policy and portfolio performance evaluation); Fama (1970), Journal of Finance; Brinson, Hood and Beebower (1986), Financial Analysts Journal; CFA Institute 2026 Level I readings Basics of Portfolio Planning and Construction, Portfolio Risk and Return Part II and Rates and Returns (cfainstitute.org); and the SIDC Module 12 Study Outline for July to December 2026 examinations, Section 4, Topic 7. Worked figures computed in Python. As at October 2026. Independent prep, not endorsed by SIDC or the SC.

Must-know for the exam

Weak form: past prices and volume. Semi-strong: all public information. Strong: all information, private included. Each stronger form contains the weaker ones.
Weak-form efficiency defeats technical analysis; semi-strong efficiency also defeats fundamental analysis of public data; only strong-form efficiency defeats insiders.
Anomalies: January, small-firm, low P/E (value) and post-earnings-announcement drift. A random walk in prices is consistent with efficiency, not an anomaly.
IPS objectives: return requirement and risk tolerance (ability and willingness). Constraints: liquidity, time horizon, tax, legal and regulatory, unique circumstances.
Strategic asset allocation is the long-term policy mix; tactical allocation is a temporary tilt from it. Brinson, Hood and Beebower (1986): policy explained 93.6% of return variation.
Sharpe = (Rp − Rf) ÷ σp. Treynor = (Rp − Rf) ÷ βp. Jensen's alpha = Rp − [Rf + βp(Rm − Rf)].
M² = Rf + Sharpe × σm, compared with Rm. Information ratio = (Rp − Rb) ÷ tracking error. Tracking error = standard deviation of active returns.
Use Sharpe when the fund is the investor's whole risky portfolio; Treynor or Jensen when it is one part of a diversified portfolio.
Time-weighted return links sub-period returns and ignores cash flows: use it to judge managers. Money-weighted return is the IRR and reflects the client's timing.
A valid benchmark is unambiguous, investable, measurable, appropriate, reflects current opinions, is owned by the manager and is specified in advance.

On this page · 6 sections

Traps that cost marks

Assuming the measures must agree. They diverge when a portfolio is poorly diversified.
Comparing with the raw market return instead of the CAPM return for the fund's beta.
Treating the three forms as separate boxes. Each stronger form contains the weaker ones.
Comparing raw returns, or scaling the excess return by σp ÷ σm instead of σm ÷ σp.
Averaging the yearly returns arithmetically, or reporting the money-weighted return.
Mixing Sharpe inputs (excess over risk-free, total risk) with information ratio inputs (excess over benchmark, tracking error).
Treating insider profits as a failure of semi-strong efficiency, which covers only public information.
Forgetting to subtract the risk-free rate, or putting the market's premium in the numerator.

Market efficiency: the three forms and what each rules out

The SIDC syllabus (Module 12 Topic 7.1) follows Fama's three forms. They are nested, so evidence against a weaker form is evidence against every stronger one.

Form	Prices reflect	Strategy that cannot earn abnormal returns	Evidence against it
Weak	Past prices and volume	Technical analysis	Profitable trading rules based on past prices
Semi-strong	All public information	Technical and fundamental analysis	Post-earnings-announcement drift; slow reaction to news
Strong	All information, public and private	Even insider trading	Insiders earning abnormal returns

Anomalies such as the January effect, the small-firm effect and the low P/E effect seem to contradict efficiency. A random walk in prices is what efficiency predicts: prices move only on new, unforeseeable information. If the market is semi-strong efficient, a low-cost diversified index portfolio is the sensible strategy.

Trap: saying weak-form efficiency implies semi-strong efficiency (the nesting runs the other way), or treating insider profits as a failure of semi-strong efficiency.

Takeaway: Weak ⊂ semi-strong ⊂ strong. Beat the weak form and you have beaten all three.

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Portfolio management and performance evaluation

7 min read6 sections

Must-know for the exam

Weak form: past prices and volume. Semi-strong: all public information. Strong: all information, private included. Each stronger form contains the weaker ones.
Weak-form efficiency defeats technical analysis; semi-strong efficiency also defeats fundamental analysis of public data; only strong-form efficiency defeats insiders.
Anomalies: January, small-firm, low P/E (value) and post-earnings-announcement drift. A random walk in prices is consistent with efficiency, not an anomaly.
IPS objectives: return requirement and risk tolerance (ability and willingness). Constraints: liquidity, time horizon, tax, legal and regulatory, unique circumstances.
Strategic asset allocation is the long-term policy mix; tactical allocation is a temporary tilt from it. Brinson, Hood and Beebower (1986): policy explained 93.6% of return variation.
Sharpe = (Rp − Rf) ÷ σp. Treynor = (Rp − Rf) ÷ βp. Jensen's alpha = Rp − [Rf + βp(Rm − Rf)].
M² = Rf + Sharpe × σm, compared with Rm. Information ratio = (Rp − Rb) ÷ tracking error. Tracking error = standard deviation of active returns.
Use Sharpe when the fund is the investor's whole risky portfolio; Treynor or Jensen when it is one part of a diversified portfolio.
Time-weighted return links sub-period returns and ignores cash flows: use it to judge managers. Money-weighted return is the IRR and reflects the client's timing.
A valid benchmark is unambiguous, investable, measurable, appropriate, reflects current opinions, is owned by the manager and is specified in advance.

On this page · 6 sections

Traps that cost marks

Assuming the measures must agree. They diverge when a portfolio is poorly diversified.
Comparing with the raw market return instead of the CAPM return for the fund's beta.
Treating the three forms as separate boxes. Each stronger form contains the weaker ones.
Comparing raw returns, or scaling the excess return by σp ÷ σm instead of σm ÷ σp.
Averaging the yearly returns arithmetically, or reporting the money-weighted return.
Mixing Sharpe inputs (excess over risk-free, total risk) with information ratio inputs (excess over benchmark, tracking error).
Treating insider profits as a failure of semi-strong efficiency, which covers only public information.
Forgetting to subtract the risk-free rate, or putting the market's premium in the numerator.

Market efficiency: the three forms and what each rules out

The SIDC syllabus (Module 12 Topic 7.1) follows Fama's three forms. They are nested, so evidence against a weaker form is evidence against every stronger one.

Form	Prices reflect	Strategy that cannot earn abnormal returns	Evidence against it
Weak	Past prices and volume	Technical analysis	Profitable trading rules based on past prices
Semi-strong	All public information	Technical and fundamental analysis	Post-earnings-announcement drift; slow reaction to news
Strong	All information, public and private	Even insider trading	Insiders earning abnormal returns

Trap: saying weak-form efficiency implies semi-strong efficiency (the nesting runs the other way), or treating insider profits as a failure of semi-strong efficiency.

Takeaway: Weak ⊂ semi-strong ⊂ strong. Beat the weak form and you have beaten all three.

Premium

Every note. Every question. One pass.

4 more sections of this note are part of Premium.

Every section of every study note
Every question in every live SIDC module
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From ≈RM16.58/mo on the Until-you-pass pass (12 months)

Portfolio management and performance evaluation

Must-know for the exam

Traps that cost marks

Market efficiency: the three forms and what each rules out

Portfolio management and performance evaluation

Must-know for the exam

Traps that cost marks

Market efficiency: the three forms and what each rules out

Security analysis: fundamental and technical