Asked by Kolton Alvey on May 04, 2024
Verified
The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM,
A) therefore, it does not matter which measure is used to evaluate a portfolio manager.
B) however, the Sharpe and Treynor measures use different risk measures. Therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario.
C) therefore, all measure the same attributes.
D) therefore, it does not matter which measure is used to evaluate a portfolio manager. However, the Sharpe and Treynor measures use different risk measures, so therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario.
E) None of the options are correct.
CAPM
The Capital Asset Pricing Model, a theory used to determine the expected return on investment by correlating the risk and the non-diversifiable risk of the market.
Treynor Measures
A performance metric that assesses the returns earned on a portfolio in excess of the risk-free rate, adjusted for market risk.
Sharpe
A ratio used to calculate the risk-adjusted return of an investment, comparing the excess return of the investment to its standard deviation of returns.
- Absorb the range of measures utilized in assessing the achievement of portfolio objectives.
Verified Answer
ZK
Zybrea KnightMay 08, 2024
Final Answer :
B
Explanation :
The Sharpe, Treynor, and Jensen measures are indeed derived from the Capital Asset Pricing Model (CAPM), but they use different risk measures. The Sharpe ratio uses total risk (standard deviation of portfolio returns), while the Treynor ratio uses systematic risk (beta). This difference means that the appropriateness of each measure can vary depending on the investment scenario, such as whether the portfolio is diversified or not.
Learning Objectives
- Absorb the range of measures utilized in assessing the achievement of portfolio objectives.