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Beta

  • Sensitivity of the return of the asset to the market return is known as Beta
  • Beta is calculated as follows:-


 

Portfolio Beta

  • Beta can also be calculated for portfolio
  • Portfolio Beta is the weighted average of the betas of individual assets in the portfolio

Sharpe ratio
Sharpe ratio:


 

Rp = portfolio return, Rf = risk free return

The higher the Sharpe measure, the better the portfolio


Treynor ratio
Treynor ratio:

 

Rp = portfolio return, Rf = risk free return

The higher the Treynor measure, the better the portfolio

However, this measure should be used only for well-diversified portfolio

 

Jenson’s alpha:

 

Jenson’s alpha:

 

Rp = portfolio return, Rc = return predicted by CAPM

Positive alpha (portfolio with positive excess return) is always preferred over negative alpha

 





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