Risk Adjusted Return Measures: Ex-Post Jensen’s Alpha
On an ex-post basis, performance can be appraised by using the Security Market Line (SML) as a performance benchmark. The difference between the account’s performance and the risk free rate would then equal the sum of:
- Manager’s alpha
- The product of the manager’s beta and the market risk premium
- Random error
Manager alpha is the return generated in excess of what “should have” been generated, given the level of risk taken.
For more information, see all articles on: Active Management, Investment Returns, Performance Measurement, Portfolio Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
[...] The Treynor measure relates excess returns to the systematic risks assumed by a manager. In this regard, it provides the same assessment of manager’s skill as does Jensen’s alpha. [...]
May 7th, 2008 at 7:33 am