Question

In: Finance

Finally examine how each measure relates to excess returns and the relevant risk. In your analysis...

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

Solutions

Expert Solution

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.


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