This week we introduced two major performance evaluation measures: Sharpe’s and Treynor’s. Which measure are you...

This week we introduced two major performance evaluation measures: Sharpe’s and Treynor’s. Which measure are you most likely to use for your current portfolio (the one you reported holding for your client in Portfolio Report 1)? What benchmark would you choose to compare performance of your portfolio?

The use of the Sharpe’s ratio has been more mainstream. Sortino’s is rarely mentioned in undergrad textbooks; however it is used by practitioners. Sortino’s Ratio is only penalizing for harmful volatility. In your opinion, do you think it would be appropriate to utilize this ratio? Would you use it to evaluate your current portfolio?

Expert Solution

Sharpe Ratio = [E(Ri) - Rf] / SDi

Treynor Ratio = [E(Ri)-Rf] / Betai

Sortino Ratio = [E(Ri) - MAR] / Down side deviation

Where E(Ri) is the expected return on security i , Rf is the Risk free rate, SD is the standard deviation of returns of the security i, MAR is the minimum acceptable return. Down side deviation is also called semi standard deviation.

While SD represents total risk i.e. systematic risk + unsystematic risk, Beta only represents market risk. For a well diversified portfolio, the unsytematic risk is neglibile and therefore Sharpe and Treynor ratios converge. If the portfolio is well diversified one can use the Trenynor Ratio. However, if the portfolio is not diversified one, Sharpe ratio is a better measure of portfolio performance.

The Sortinio Ratio differes from Sharpe ratio in that it considers the semi standard deviation in the denominator instead of the standard deviation used in case of Sharpe ratio. Down side deviation is an asymmetric measure of risk. It only considers outcomes when the return on the security was lower than the expected return. In other words, it considers only negative shocks and not positive surprises.

Using Sortiono ratio will result in increased allocation to stocks which have a distribution of returns that is positively skewed and lower allociation to stocks where the distribution of returns is negatively skewed. The Sortino ratio can therefore be used in practice and can improve the selection of stocks. It would help in eliminating stocks with high probability of big down side surprises.

jeff jeffy answered 2 years ago

Using appropriate performance measures is crucial for the success of the performance evaluation and incentive schemes....

Using appropriate performance measures is crucial for the success of the performance evaluation and incentive schemes. However, using improper performance measures may result in goal conflict problems (e.g., between departments, between managers and shareholders, or between a superior and a subordinate). Describe two goal conflict situations caused by the use of inappropriate performance measures and also discuss potential solution(s) for each situation.

List the performance evaluation measures. When is it appropriate to use them?

Performance measures can be used to evaluate healthcare performance. Define the four(structure measure, process measure, outcome...

Performance measures can be used to evaluate healthcare performance. Define the four(structure measure, process measure, outcome measure, patient experience measure) categories of measures and give a hospital example of each concept. Required one page answer.Please provide correct answer

Performance Measure Standards. How can we use raters to measure overall performance and how do we...

Performance Measure Standards. How can we use raters to measure overall performance and how do we establish the ratings typically.

One of the major feature of evaluation is to measure the readiness of the healthcare system...

One of the major feature of evaluation is to measure the readiness of the healthcare system and ensure that it will not incorporate any risk to patients or organization. Discuss the risk assessment and provide example of health or public information system project and apply the risk assessment in this project

1) The __________________ establishes the baseline from which we measure performance and is later used in...

1) The __________________ establishes the baseline from which we measure performance and is later used in Cost Control. a) Work Breakdown Structure b) Resource Plan c) Cost Estimate d) Cost Budget

Last week we were introduced to hypothesis testing using t and z-tests. This week we extend...

Last week we were introduced to hypothesis testing using t and z-tests. This week we extend that set of tools to two sample tests. However, here we have a greater variety of tests. For the t-test alone there are three variants based on the independence of the groups and whether we can assume variances the same or variances between the groups as different. The variances issue is easy as we can always assume they are different as the test is...

The performance of the bank branch manager is often difficult to measure. Evaluation can include such...

The performance of the bank branch manager is often difficult to measure. Evaluation can include such variables as loan quality, deposit growth, employee turnover, complaint levels, or audit results. However, many other factors that influence performance, such as the rate structure, changes in the market area served by the branch, and loan policy as set by senior management, are beyond the branch manager’s control. The appraisal system presently used by First Trust Bank is based on points. Points are factored...

This week we are studying monetary policy. There are two major opinions on what the appropriate...

This week we are studying monetary policy. There are two major opinions on what the appropriate monetary policy should be: activists argue that monetary policy should be deliberately used to smooth out the business cycle while non-activists argue against discretionary monetary policy. Discuss some of the reasons why the activists favor intervention and the non-activists do not.

3. Briefly name and describe two (quantitative) measures of competitive balance. Which measure do you think...

3. Briefly name and describe two (quantitative) measures of competitive balance. Which measure do you think best captures the concept, and why? 4.Explain the link between diminishing returns and competitive balance. 5.Explain the invariance principle, i.e. why, with or without Free Agency, Babe Ruth (perhaps history’s most famous baseball player) was destined to play for the Yankees.

Question