Risk Adjusted returns

Question 1

Explain Sharpe Ratio

Answer 1

shows risk adjusted performance of portfolio. High Sharpe ratio returns are good due to smart investing and not excessive risk taking

Question 2

Sharoe Ratio

Answer 2

Standard Deviation of the return on the investment

Question 3

Explain Information ratio

Answer 3

It measures the relative return between actively managed portfolio and the return from the benchmark but also takes volatility into account

Question 4

Information ratio formula

Answer 4

tracking error

Question 5

What does CAPM measure?

Answer 5

it shows whether an investment is worth making in terms of risk free return and the amount of risk involved

Question 6

CAPM formula

Answer 6

RF + Beta(RM-RF)

RF is risk free rate (t bills)
RM market return

Question 7

What does Alpha % measure?

Answer 7

to compare performance of a portfolio against the expected market return. It therefore shows the value added by the fund manager

Question 8

Alpha formula

Answer 8

Alpha = actual portfolio return - CAPM

Alpha = Actual portfolio return - RF+beta(RM-RF)