Chapter 11

Question 1

Standard Deviation

Answer 1

Measures how widely dispersed outcomes are around the mean expected outcome.
Expressed in percent per annum.

68.26%
95.5%
99.75%

Question 2

Sharpe Ratio

Answer 2

Measures the excess return for every unit of risk taken.

The higher of the standard deviation the lower the sharpe ratio. So risk adverse investors prefer a higher sharpe ratio.

Question 3

Alpha

Answer 3

Jensen’s alpha
The difference between the return you would expect for a security given its beta and the return it has actually produced.

Value added by the fund manager.

Positive = performed better than expected given its beta
Negative = performed worse

Question 4

Information Ratio

Answer 4

Gauge skill of fund manager.
Measures expected active return of the managers portfolio divided by the amount of risk the manager has taken relative to the benchmark.
Shows the consistency with which the manager beats the benchmark index.

If the fund outperforms it will be positive
If underperforms it will be negative