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Portfolio Performance Measurement Tools

The document describes three tools used for financial analysis: (1) the Sharpe Ratio, which measures risk-adjusted return, (2) the Treynor Measure, which is similar to the Sharpe Ratio but uses systematic risk instead of total risk, and (3) Jensen's Alpha, which is a measure of risk-adjusted excess return based on the Capital Asset Pricing Model. Each tool is defined using mathematical formulas involving variables such as portfolio return, risk-free rate of return, systematic risk, expected market return, and excess return.

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5 views3 pages

Portfolio Performance Measurement Tools

The document describes three tools used for financial analysis: (1) the Sharpe Ratio, which measures risk-adjusted return, (2) the Treynor Measure, which is similar to the Sharpe Ratio but uses systematic risk instead of total risk, and (3) Jensen's Alpha, which is a measure of risk-adjusted excess return based on the Capital Asset Pricing Model. Each tool is defined using mathematical formulas involving variables such as portfolio return, risk-free rate of return, systematic risk, expected market return, and excess return.

Uploaded by

dursatsan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd

APPENDIX

TOOLS USED FOR THE ANALYSIS

(i)

SHARP RATIO

The Sharpe measure follows his earlier work on capital asset pricing model (CAPM) dealing specifically with capital market line (CML).

The Sharpe measure of performance denoted by S is given by

S = Where,

Ri Rf i

Ri = the average rate of return on portfolio i during a specified time period. Rf = the average rate of return on a risk free investment during the same period

(ii)

TREYNOR MEASURE

Sharpe Ratio and Treynor measure give the same results in the case of highly diversified portfolios as the total risk of portfolios approaches that of a market portfolio.

T =

Ri Rf

Where, Ri = the average rate of return on portfolio i' during a specified time period. Rf = the average rate return on a risk free investment during the same period. = the slope of the funs characteristic line during that time period (this indicates portfolios relative volatility with respect to market portfolio).

(iii)

JENSENS ALPHA

Jensens measure is also based on capital asset pricing model. CAPM estimates the expected return on any security or portfolio by the following expression:

E (Ri) = Rf + i [E(Rm-Rf) Where, E (Ri) = expected return on security or portfolio I Rf = Risk free return I = Systematic risk (beta) of security E (Rm) = expected return on the market portfolio I Jensens alpha () is defined as: Ri Rf = I + I (Rm-Rf) + I

The value of aj suggests whether the portfolio manager possesses superior (inferior) market timing and stock selection skills. A positive () is an indication of superior fund management ability.

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