PORTFOLIO PERFORMANCE MEASURES

Question 1

TREYNOR INDEX

Answer 1

Uses Beta
Must be compared to another Treynor Ratio
Formula: Portfolio realized rate - risk free rate / Beta of portfolio
Higher Treynor = Better because greater gain per unit of risk
Measures reward relative to systematic risk
Measures risk with BETA

Question 2

INFORMATION RATIO

Answer 2

Formula: Portfolio’s actual return - return of benchmark / standard deviation of difference between portfolio returns and index returns
—Relative risk-adjusted performance measure
Measures excess return and consistency of fund manager relative to benchmark

Question 3

SHARPE INDEX

Answer 3

Formula: portfolio realized rate - risk free rate / standard deviation of portfolio
—measures how much return received for each unit of risk
—Higher Sharpe = Better (more return per unit of risk)
—Must be compared to another Sharpe
—Measures risk premiums of portfolio relative to total risk in portfolio
Measures risk with STANDARD DEVIATION

Question 4

JENSEN’S ALPHA (Model)

Answer 4

Formula: realized port rate - [risk free +(expected market rate - risk free) X beta of port
—Measures manager’s performance relative to market, and determines differences between actual return and required return (CAPM)
—Attempts to measure “absolute performance” (risk-adjusted)
Higher the Alpha, higher the manager’s level of performance.
Calculation for Alpha is ACTUAL return minus EXPECTED return
Measures Risk with BETA

Question 5

R SQUARED

Answer 5

R squared is the square of The Correlation
If correlation is 0.80, then Rsq is .64
If R sq is higher than 0.70, then Beta is a good measure of risk because the portfolio is well-diversified.
If R sq is less than .70, then you must use Standard Deviation as the measure of risk because it is not a well-diversified portfolio.

Question 6

MEASURES OF RISK COMPARED

Answer 6

Sharpe — Relative — STD Dev — High is good — lower than Rsq

Treynor — Relative — Beta — High is good — higher than Rsq

Jensens — Not relative — Beta — should be more than 0 — higher than Rsq

Info Ratio — Relative — Tracking error — High is good — higher than Rsq

Question 7

VARIABILITY

Answer 7

Measured using deviation

Measure of how far return varies from expected (compared to mean average)

Question 8

VOLATILITY

Answer 8

Measured by beta
Measures relative relationship between benchmark (market?) and other investment relative to that market
Shows how much more or less the investment moved compared to the market
How much more or less volatile is the investment than the market