P. 1
Sharpe, Treynor, And Jensen Ratio

# Sharpe, Treynor, And Jensen Ratio

Ratings:
(0)
|Views: 137|Likes:

See more
See less

12/10/2012

pdf

text

original

# Sharpe, Treynor, Jensen

SHARPE, TREYNOR AND JENSEN'S RATIOS SHARPE RATIO This ratio measures the return earned in excess of the risk free rate (normally Treasury instruments) on a portfolio to the portfolio's total risk as measured by the standard deviation in its returns over the measurement period. Or how much better did you do for the risk assumed. S = Return portfolio- Return of Risk free investment Standard Deviation of Portfolio Example: Let's assume that we look at a one year period of time where an index fund returned 11% Treasury bills earned 6% The standard deviation of the index fund was 20% Therefore S = 11-6/.20 = 25 The Sharpe ratio is an appropriate measure of performance for an overall portfolio particularly when it is compared to another portfolio, or another index such as the S&P 500, Small Cap index, etc. That said however, it is not often provided in most rating services. TREYNOR RATIO This ratio is similar to the above except it uses beta instead of standard deviation. It's also known as the Reward to Volatility Ratio, it is the ratio of a fund's average excess return to the fund's beta. It measures the returns earned in excess of those that could have been earned on a riskless investment per unit of market risk assumed. T = Return of Portfolio - Return of Risk Free Investment Beta of Portfolio The absolute risk adjusted return is the Treynor plus the risk free rate. Assume two portfolios A B

http://www.efmoody.com/investments/sharperatio.html (1 of 3) [11/14/2009 8:08:11 PM]