Performance Evaluation Flashcards
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
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
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
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
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