KIC000038 - The Security Characteristic Line The Security Characteristic Line Excess Return on Asset Characteristic Line Beta for the firm is the

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The Security Characteristic Line Excess Return on Asset Characteristic Line '\ Beta for the firm is the slope of this line. -s-; Jensen Alpha for the firm is the intercept of this line. Excess Return on Market Total Risk = Systematic + Fund-Specific How are the two types of risk related? Taking variances . .. Y=a+p.%+e Var(Y) = Var(a) + Var(f3X) + Var(e) ai = f32a~ + a; TSS = RSS + ESS Percent of total risk that is systematic p 2 0-i, = RSS = R 2 P'o-~ +0-; TSS 0-; = ESS = l-R' p20-~ +0-; TSS Percent of total that is fund - specific Performance Measures There are several performance measures that may be used to compare or rank portfolios: • Sharpe ratio • Treynor ratio • Jensen's alpha • Appraisal ratio· M2 The choice of the most appropriate measure is generally dependent upon the circumstances involved. The Security Characteristic Line The percentage of total variance being captured by beta (in other words the portion of total risk that is systematic) is given by the R
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000038 - The Security Characteristic Line The Security Characteristic Line Excess Return on Asset Characteristic Line Beta for the firm is the

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