Performance Evaluation Flashcards

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1
Q

Sharpe Ratio

A

Sharpe Ratio

SR = Rp - rf

σp

  • denominator = total risk, doesn’t difference between good/bad risk
  • penalizes for upside risk which is a penalty for all volatility, even good volatility
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2
Q

Treynor Ratio

A

Treynor Ratio

TR = Rp - rf

σß

  • Sim to SR, but uses Beta (systematic risk) instead of σ (total risk)
  • only used in highly diversified portfolios, it’s only considering systematic, not idiosyncratic risk
  • when benchmarks assume efficient markets
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3
Q

Information Ratio (IR)

A

Information Ratio

IR = E(Rp) - E(RB)

σ(Rp - RB)

  • active return per unit of active risk (tracking risk)
  • active risk: weight each asset class in a portfolio by it’s active risk%2 and sum

Square root the answer

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4
Q

Appraisal Ratio

A

Appraisal Ratio

AR = alpha

σe

  • alpha computed from any factor model
  • σe = std dev of the residual unsystemic risk
  • may only be given R2 (explained risk)

therefore, 1 - R2 = unexplained risk (residual)

1 - R2 x σ2 = X

Square root of X = σe

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5
Q

Sortino Ratio

A

Sortino Ratio

SR = Rp - Rt

σd

  • Rt = target return (MAR)
  • σd = semi-deviation - measuring downside deviation
  • penalizes managers for only bad volatility
  • higher = better
  • used for funds with non-symmetrical or skewed return distributions
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