Jensen’s alpha will produce the same result as the Treynor measure, and the M squared and Sharpe ratio measures will produce the same conclusions regarding the existence of manager skill. However, it is possible for the Sharpe and M squared to identify a manager as not skillful, although the ex-post alpha and the Treynor measure come to the opposite conclusion.

This outcome is most likely to occur in instances where the manager takes on a large amount of nonsystematic risk in the account relative to the account’s systematic risk.

Things to Remember

• Jensen's alpha is a risk-adjusted performance metric that measures an investment manager's ability to outperform the market given the level of risk taken.
• Sharpe ratio measures the risk-adjusted return of an investment or a portfolio.
• Treynor measure, like Jensen's alpha, is a risk-adjusted performance measure that evaluates the excess return generated by an investment per unit of systematic risk.
• M squared is a measure of the risk-adjusted return of an investment, taking into account a benchmark's performance.
• Information ratio measures the active return of a portfolio relative to a benchmark, adjusted for the volatility of those returns.