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Jensens Alpha Note that Treynor ratio is Risk Premiuim / Beta (systematic risk) or [ E(Rp)-Rf]/Bp or remember TB as beta is always in denominator Sharpe Ratio is same as Treynor Ratio but here we use standard devia Sharpe Ratio = [ E ( Rp ) .Risk free returns Beta of Portfolio a treyner ratio > market treynor ratio genrates +ve Alpha . (We are to it !) Sharpe Ratio can be applied to all portfolios b/c it uses total risk . Low diversification results in higher Std D Beta Is Quantity of Risk taken ( remember BenQ computers ) & Market risk Premium ( Exp Ret portfoli Information Ratio = Alpha of portfolio / Tracking error of portfolio ( tracking error is std deviation of m . todays returns * beta) Measures of Performance Treynor Ratio .IN EWMA model always remember the following formula for new estimation of s Decay Factor * (Std Deviation)^2 + (1-decay factor)(Todays stock market Returns) Note that both Decay & Deviation are starting from D and would stay togather & Garch Model new std deviation Omega + STD Deviation * Alpha + todays returns * Beta Note that todays returns come with beta here Garch model -----> o . std deviation * alpha . Treynor ratio is used only fo Jensons alpha is used for portfolios that have same Beta Sharpe Ratio is considered good for historical performance where as Treynor Ratios is considered mor Also Treynor Ratio = Alpha of portfolio ie Exp (Ret of portfolio ) .[ Rf ret + Beta (Exp Ret Market -Rf Ret)] …. sad tb ( o --stands for omega .Rf] / Std Dev of portfolio Jensons Alpha / Alpha is assets excess return over return predicted by CAPM Alpha = Exp Ret portfolio . Sharpe Ratio .

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in 1994 Nick Lesson lost $ 296 Million .Financial Disasters : Theory Major cases Drysdale Securities & Chase Manhattan Bank 1976 Drysdale Sec could borrow $300 Million In unsecured Funds From Chase Manhattan Bank. Kidder Peabody misrepresented facts by exploiting shortcoming of cumpter system which could calculate present value of forward contracts. He was able to still trade b/c he received $345 million from london office b/c they think Nick's starategy of going long -short on market is definitely risk free while Nick lesson was going LONG_LONG on both the exhanges and thus getting in to bigger losses. Given The amount . . but showed profit of $46 million. the Drsdale took significant exposure in Bond market which declined in value Drysdale could borrow huge funds on bonds because in order to save time it was allowed to value Securities with accrued interest . British Barrings Junior trader was mailnly using straddle strategy to hide his pervious losses. Also since Nick Lesson was both Floor manager of SIMEX & manager in charge of settlement operations both positions helped him hide significant losses which resulted him to take higher risk in order to recover presvious losses. The system failed to realize that profits shall evaporate once financing costs of cash bonds were taken in account Nick Lesson .