Financial Risk Manager Part 1
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Q.3488 Measuring excess return per unit of risk is essential for evaluating the performance of an investment relative to its risk level. Which of the following measures excess return per unit of total risk?
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TTanishq
A
Jensen's alpha
B
Treynor ratio
Explanation:
Explanation
Jensen's alpha measures excess return per unit of total risk (standard deviation), while Treynor ratio measures excess return per unit of systematic risk (beta).
Key Differences:
-
Jensen's Alpha: Uses total risk (standard deviation) in the denominator
- Formula: α = R_p - [R_f + β(R_m - R_f)]
- Measures risk-adjusted performance relative to total portfolio risk
-
Treynor Ratio: Uses systematic risk (beta) in the denominator
- Formula: (R_p - R_f) / β
- Measures risk-adjusted performance relative to market risk only
Since the question specifically asks about "excess return per unit of total risk," Jensen's alpha is the correct answer as it incorporates the complete risk profile of the investment, including both systematic and unsystematic risk components.
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