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Level 63

Risk Adjusted Performance Appraisal


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Ex Post Alpha (Jensen's alpha)
Uses SML (CAPM) to determine benchmark, ex post. Relates excess return to systematic risk
Treynor Measure
Related to ex-post alpha, relates excess return to systematic risk. Also uses ex-post SML as benchmark, = Ra-Rf/Ba
Sharpe Ratio
Slope of the capital market line
M^2
Based on CML. Measures what the account would have returned if it took on the same risk as the market index.
information ratio
(Rp - Rb) / s(Rp-Rb)
Type 1 error
Keeping manager with no value-add.
Type 2 error
Firing a manager that does add value.
Performance Evaluation 3 Steps:
1 - performance measurement 2 - performance attribution 3 - performance appraisal
MWR sensitive to CFs, TWR is not
MWR vs TMR - timing and size of CF
Linked IRR
Calculate MWR over reasonable frequent time periods and chain link - results in approx of TMR
Roll's critique
When using risk adj return ratios based on CAPM: