
Explanation:
Hedge funds are generally considered absolute return vehicles rather than relative return investments. Since they often lack a direct, highly correlated benchmark and usually employ leverage and unconstrained strategies, measuring performance in terms of total risk is appropriate. The Sharpe ratio, which evaluates the excess return relative to the total risk (standard deviation) of the fund, is the standard and most widely used performance indicator for hedge funds.
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Q.26 A newly established hedge fund is looking to settle on the most appropriate indicator to measure its performance. Which of the following measures should the fund pick?
A
Treynor’s ratio
B
Information ratio
C
Sharpe ratio
D
Alpha