Question

With respect to performance measures, the use of the standard deviation of portfolio returns is a distinguishing feature of the:

	A.	Sharpe ratio
	B.	Treynor ratio
	C.	beta measure
	D.	Jensen's alpha

Answer 1

In the context of performance measurement, the standard deviation of portfolio returns is a key feature of Sharpe's Ratio, as the same is calculated as shown below:

Sharpe's Ratio = [Portfolio Return - Risk-Free Rate] / Standard Deviation of Portfolio Return

Treynor's Ratio is a portfolio's expected risk premium adjusted for its sensitivity to market returns. Hence, the ratio uses beta as a measure of portfolio return risk relative to market returns, instead of the standard deviation.

Jensen's Alpha is the excess return of a stock which cannot be attributed to its systematic risk. Therefore, this measure has no direct relation to the overall portfolio's standard deviation.

Beta Measure is a measure of a stock/portfolio's return with respect to the overall market portfolio's return. The beta measure uses the standard deviation of both the portfolio and overall market to arrive at the beta value but the portfolio's standard deviation is not a key component of the portfolio returns.

Therefore, the correct option is (a).