Portfolio Management

Question 1

Sharp ratio

Answer 1

This is the average excess return over total risk
o This is based on ex post capital market line (past performance
CML

Question 2

Treynor Index

Answer 2

Systematic Risk

Question 3

Jensen’s Alpha

Answer 3

systematic risk

Question 4

M^2

Answer 4

Market risk

Question 5

Sharpe ratio formula

Answer 5

SRp = (Rp – Rf)/ σ p

Question 6

Sharpe ratio shows?

Answer 6

The risk premium per unit of TOTAL RISK
o The higher it is, the better the portfolio

Shows if portfolio outperformed the market or not, on a total risk
basis

Question 7

Treynor Index formula

Answer 7

TIp= (Rp – Rf)/ ß

Shows average excess return / Market risk (Systematic Risk: Beta)

or risk premium per unit of market beta

Question 8

Jensen’s Alpha measures

Answer 8

Contribution of portfolio management beyond return attributable
to the market risk

Question 9

M^2 measures

Answer 9

This aligns the level of risk of portfolio to the market so you can compare
correctly
- This is done by combining the portfolio with the risk free asset until the
new portfolio has the same standard deviation as the bench mark
(market/Index)