Lecture 8 Performance Evaluation, Buffet’s Alpha and Revision Flashcards
Risk Adjustment
Why is it important to adjust investment performance for risk?
Returns must be evaluated relative to the risk taken. This adjustment differentiates returns based on market risk (β) and residual risk (εP) from active management.
Sharpe Ratio
What does the Sharpe Ratio measure?
It measures mean excess return per unit of total risk:
Treynor Measure
What is the Treynor Measure, and how is it calculated?
It measures mean excess return per unit of systematic risk (ß)
Suitable for comparing sub-portfolios or manager performance
Jensen’s Alpha
What does Jensen’s Alpha measure?
It measures a portfolio’s excess return over CAPM expectations:
Information Ratio (IR)
What does the Information Ratio (IR) assess?
It evaluates stock-picking skills by comparing Jensen’s Alpha to residual risk:
