FIN 367 Study Guide - Final Guide: Jack L. Treynor, Treynor Ratio, Sortino Ratio

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4 Jan 2017
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Investment Final Notes 12/13/2012 8:20:00 PM
Section 13
Risk Return Measures
Sharpe ratio tells us whether a portfolio’s return were the
results of smart investment decision or excess risk
Sharpe Ratio = (Rp RF)/ sp s= standard deviation
Sharpe is a good ratio for comparison of portfolios when the
portfolios are NOT well diversified
Treynor and Alpha
Treynor ratio tells us whether a portfolio’s returns were the
results of smart investment decisions or excess risk.
However, the excess return is divided by systematic risk not total
risk
A ratio developed by Jack Treynor that measures returns earned in
excess of that which could have been earned on a
riskless investment per each unit of market risk.
Treynor Ratio = RP RF / Bp
Is a good ratio for comparison of portfolios when the portfolios are
well diversified
Jenson Alpha is an absolute measure of performance against the
expected return of an asset or portfolio
Alpha = Actual Return Expected Return
Alpha = Actual Return - [RF + (Risk Premium * B)]
Sortino Ratio
Measures the risk-adjusted return of an investment, like the
sharpe ratio, but penalizes returns falling below a user-
specified target rate of return. The sortino only penalizes
downside deviations, because upward movements in prices are
good, whereas sharpe penalizes all deviations
Sortino Ratio = Rportfolio R target rate / Semideviation
Sortino to differentiate between good and bad volatility in the
Sharpe ratio. This differentiation of upwards and downwards
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