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Investment Portfolio measurement
Fin 402
Investment Portfolio Team A
In evaluating our portfolio, we have managed to put together a collection of investments
that have provided considerable return over time. Given the importance of risk versus return and
the fact that high returns doesn’t necessarily equal an efficient portfolio, we must then take our
portfolio and evaluate the efficiency to see how well we have managed and picked our securities.
Using the modern portfolio theories learned we will look at our portfolio with a critical eye to
see where we stack up. The indices that we will evaluate are: The William Sharpe ratio, the
Jensen measure and the Treynor ratio. We’ll begin with the William Sharpe ratio.
Sharpe Ratio
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View Full DocumentThe William Sharpe ratio was designed by (of course) William Forsyth Sharpe, one of the
originators of the Capital Asset Pricing Model. With the ratio, you effectively measure risk
adjusted performance. By subtracting the risk free rate and then dividing the result by the
standard deviation of the portfolio returns. To further explain the idea behind the Sharpe ratio,
you basically want to understand where the source of your returns are coming from in regards to
management.
With portfolio management, as I said above, you don’t only want to see returns,
but also efficient returns.
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This formula sheds light onto how the returns of a portfolio are
generated, is it from luck? or an overly risky collection of securities? Rather than those reasons,
you want the answer to be due to a perfect selection of securities that limit risk, while
maximizing return. So basically you want to make sure that you are realizing the highest returns
for the amount of risk you are taking on. The formula is as follows: expected portfolio returns
minus the risk free rate, then divide the result by the portfolio standard deviation. To evaluate the
resulting figure, you want the number to be positive.
The Jensen Measure
The Jensen measure is a measure of risk adjusted performance as well and the idea of this
measure is to find out the average return of a portfolio above that of the Capital Asset Pricing
Model. In other words, based on the efficient frontier, you want to be sure that the risk you are
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 Spring '12
 Franks
 Finance

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