Measuring Security Performance

Measurment Metrics. The following are used commonly to measure performance of funds. It does not imply, however, that they are meaningful, useful, or correct. Most of them compare risk to return

1. Measuring Security PerformanceMeasuring Security Performanceio]]
2. Jenson’s Alpha. Measures performance against CAPM’s Predictions.

$$\alpha =(r_i-r_f)-\beta (r_m-r_f)$$

Sharpe Ratio §

def. Sharpe Ratio. The sharpe ratio for portfolio with return $R_p$

$$\begin{array}{rl}SP& =\frac{E[R_p-{\mu }_f]}{{\sigma }_p}\\ & =\frac{{\mu }_p-{\mu }_f}{{\sigma }_p}\end{array}$$

• Used to compare securities given their risk & returns
• Measures the “risk-normalized return”
• Higher means a better risk/return profile

Treinor’s Ration §

Measures against Systematic (=market) Risk.

$$\text{TM}=\frac{E[\text{Excess return}]}{\beta }$$

Reminder: Market Beta is about how correlated the asset is to the market.