Performance Measures

Question 1

What does Sharpe ratio measure?

Answer 1

Excess return per unit of total risk (σ)

Question 2

When is Sharpe ratio appropriate?

Answer 2

For total risk evaluation

Question 3

What is M² measure?

Answer 3

Risk-adjusted return scaled to market risk

Question 4

What does Treynor ratio measure?

Answer 4

Excess return per unit of beta

Question 5

When is Treynor appropriate?

Answer 5

Well-diversified portfolios

Question 6

What is Jensen’s alpha?

Answer 6

Excess return above CAPM expected return

Question 7

What does positive alpha indicate?

Answer 7

Outperformance

Question 8

What does negative alpha indicate?

Answer 8

Underperformance