This chapter provides a selective review of the methods for mea- suring portfolio performance and the evidence on the performance of professionally managed investment portfolios. As the relevant literature is vast and expanding quickly, a complete survey is virtually impossible. This one reflects its authors’ interests, and no doubt, biases. Chapter 2 reviews the classical measures of portfolio performance developed between about 1960 and 1990. Our review emphasizes a uni- fying theme. We measure the total performance by comparing the returns on the managed portfolio to the returns of an Otherwise Equivalent (our terminology) benchmark portfolio. This is a portfo- lio with the same risk and other relevant characteristics as.
