🔥 Daily ChallengeISESecurities analysis and investment theoryMedium
An institutional analyst is comparing two portfolio managers. Manager A has a Sharpe ratio of 0.85, while Manager B has a Jensen's Alpha of 2.1%. Which statement accurately differentiates these two performance measures?
Jensen's Alpha is less reliable because it does not adjust the raw return for the portfolio's beta.
Jensen's Alpha is an absolute measure of abnormal return, while the Sharpe ratio is a relative measure.Correct
The Sharpe and Treynor ratios are absolute measures, making them more meaningful than Jensen's Alpha.
The Sharpe ratio is superior because it uses systematic risk rather than total risk in its calculation.
Why
Jensen's Alpha is an absolute measure of abnormal return, while Sharpe and Treynor are relative measures that must be compared to others or a benchmark.
