Explanation:
The Sharpe ratio is calculated by taking the risk premium of a portfolio and dividing it by its standard deviation of portfolio returns. Standard deviation measures both systematic and unsystematic (total) risk. Jensen’s alpha uses beta to determine whether a portfolio delivers excess returns compared to that of the market. Beta is a measure of systematic rather than total risk. The Treynor ratio measures a portfolio’s return in excess of the risk-free rate divided by beta, a measure of systematic rather than total risk. The information ratio relates alpha to a benchmark and tracking error.
(Book 1, Module 5.3, LO 5.g)
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Question 13
The CRO of a pension fund has asked an analyst to evaluate various return measures of the fund's equity portfolio. If the CRO is most interested in a measure of the fund's total risk, the analyst should calculate:
A
Jensen’s alpha.
B
the Sharpe ratio.
C
the Treynor ratio.
D
the information ratio.
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