In: Finance
Finally examine how each measure relates to excess returns and the relevant risk. In your analysis make a comparison between two of the four performance measures which would best be applicable in an economy slowly recovering from recession.
Jenson Alpha
Sharpe
Treynor or another other measure
Given Information
Jenson Alpha
Sharpe
Treynor or another measure
Lets understand
Each of the measures one by one
Treynor measure
Treynor ratio was developed by a well known economist Jack Treynor.
Treynor ratio says that how much excess returm you are earning over and above
the systematic risk. Basically It compares the return with Beta of the portfolio.
Treynor Ratio= rp-rf/βp
where:
rp=Portfolio return
rf=Risk-free rate
βp=Beta of the portfolio
Lets take an example
We have two securities Security A and Security B
Analysis of above example
By increasing slightly in systematic risk, we will get more returns.
This means we can use this ratio in analysing Mutual Funds, Funds with many securities.
Sharpe measure
Sharpe ratio was invented by William Sharpe.
Sharpe ratio tells us about the returns when compared with the total risk or standard deviation. In this ratio we can see the return access over the risk or standard deviation.
Treynor ratio was taking only systematic risk. But Sharpe ratio is taking overall risk
The higher the ratio good for the investor.
Lets see an example
Analysis
We can see that by increasing the risk the return is also increasing.
Summary
We can use Treynor measure to compare returns with Systematic risk
We can use Sharpe ratio to compare returns with overall risk.