An investor in the Zenith Bank of Nigeria asked whether his investment has made a difference given that his initial capital was 1m naira in 2006 relative to 1.5m naira in 2009 (a three year investment period).
First of all, for the fact that you have started judging and measuring your investment performance is a good step as a shareholder. This is because you may find other alternatives if you think that your return is not relatively satisfactory. Or, you may continue with the same broker if they give you high return.
One of the simplest ways of measuring your return is through the market index or stock index. Each country has its stock index. So in this case you should compare your return less the broker fee and expense with your index performance. If your return is lower than the index, you should rethink your investment at the investment manager's hand. You may consider other alternatives or even better investment proposals. Unfortunately, measuring investment is not very simple. Moreover, comparing the manager's performance with index is sometimes not accurate. When the index is decreasing, the investment return is decreasing too. The simplest formula of investment return is: (P1 –P0)/P0.
This means that you take your current capital of 1.5m less the initial capital of 1m and divide the result by your initial capital of 1m: (1.5m – 1m)/1m = 0.5. From this result it is clear that you got 50% return. But now the question is, how do you judge this return? Does it fit in your utility? Does it worth the risk taken? How is it compared to alternative investments?
To answer these questions need time and expertise. But the good news is that, there are tools that could help you have answers to some of these questions. Amongst them, I would mention four of them here that have been found by famous investment experts and dilate only on one of them: 1. the Sharp ratio, 2, Treynor’s measure 3, Jensen’s measure 4, Appraisal Measure.
Sharpe's ratio: The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year Central Bank’s Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed.
*For any question or comment: dauda.daramy@gmail.com
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