Interpreting risk adjusted returns

Question 1

What does the Sharpe Ratio measure?

Answer 1

Measures excess return for every unit of risk that is taken in order to achieve the return

Question 2

What does the Information Ratio measure?

Answer 2

Evaluates a portfolios performance relative to the performance of its benchmark

Question 3

What does a higher Information Ratio mean?

Answer 3

Higher added value

Question 4

What does Alpha measure?

Answer 4

Measures a mangers stock picking skills

Value added by manager

Difference between return expected and return produced

Question 5

What is Beta?

Answer 5

measure of volatility of stock or fund relative to market or benchmark

Question 6

What Beta does the market/benchmark have?

Answer 6

1

Question 7

If a stock has Beta over 1 what does that mean?

Answer 7

More volatile than the benchmark/market

Question 8

If a stock has Beta less than 1 what does that mean?

Answer 8

Less volatile than the benchmark/market

Question 9

Drawbacks of sharpe ratio

Answer 9

Need to Consider other factors/trends over time

Can be distorted by fund manager strategy

Assumes normal distribution/reliant on standard deviation

Can be distorted by volatility, costs, trading frequency, illiquidity