Practice 4

You are given the following information for two funds X and Y, relating to their
performance over the last five years.

Standard deviation
Average return Beta
of Return
X 25% 22% 1.2
Y 22% 32% 0.5
Market 18% 25% 1
Risk-free rate 6%

Calculate the Treynor, Sharpe and Jensen performance measures for Funds X and
Y. What do they tell you about the performance of the funds?

Solution

Annual Std Beta Treynor Sharpe Jensen CAPM

Return Dev
X 25% 22% 1.2 0.1583 0.8636 0.046 0.204
Y 22% 32% 0.5 0.32 0.5 0.1 0.12
MARKET 18% 25% 1 0.12 0.48
Risk free rate 6%

Sharpe measure:
Fund X outperform the fund Y and market.

Treynor measure:
Fund Y outperform the fund X and market

Jensen measure:
Fund Y outperform the fund X

If fund X and Y are non-diversified portfolio, Sharpe measure is valid to be used to

evaluate fund performance.

If fund X and Y are diversified portfolio, Treynor and Jensen measure should be
used to evaluate fund performance.