Lecture 10

Question 1

Average rates of return (4)

Answer 1

• Arithmetic average
• Geometric average
• Time-weighted average
• Internal rate of return

Question 2

Sharpe measure

Answer 2

Measures reward to total volatility trade-off

Question 3

Treynor’s measure

Answer 3

Gives excess return per unit of risk (systematic risk)

Question 4

Jensen measure (portfolio alpha)

Answer 4

Average return of the portfolio over and above that predicted by CAPM, given portfolio’s beta and average market return

Question 5

Information ratio

Answer 5

Measures abnormal return per unit of risk that could be diversified away by holding the market index portfolio

Question 6

Evaluation of adjusting returns for risk (3)

Answer 6

• Reliability requires consistent management, steady level of performance
• Many observations needed
• Accurate performance evaluation on actively managed portfolios = difficult