Which of the following statements regarding the performance measures is CORRECT?

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Multiple Choice

Which of the following statements regarding the performance measures is CORRECT?

Jensen's alpha is a performance measure that calculates the difference between the actual return of an investment and the expected return based on the capital asset pricing model (CAPM). This means it assesses how much excess return is generated from an investment compared to what is predicted by its level of risk (beta). A positive Jensen's alpha indicates that a manager has outperformed the market, whereas a negative value suggests underperformance. This measure is particularly useful for investors seeking to assess the value added (or detracted) by active portfolio management, making choice B accurate in stating that Jensen's alpha shows the difference between realized return and required return. Contextually, positive alpha does not imply consistent underperformance; it actually implies the opposite for statement A. The statement regarding the Sharpe ratio emphasizes that it is a valid measure even for non-diversified portfolios, particularly as it assesses risk-adjusted return over total risk. Lastly, while the Treynor ratio does indicate the performance relative to market risk, it is not solely an indicator of whether a manager has outperformed the market; rather, it evaluates performance with respect to systematic risk. Thus, choice B is indeed the correct statement regarding performance measures.

Jensen's alpha is a performance measure that calculates the difference between the actual return of an investment and the expected return based on the capital asset pricing model (CAPM). This means it assesses how much excess return is generated from an investment compared to what is predicted by its level of risk (beta). A positive Jensen's alpha indicates that a manager has outperformed the market, whereas a negative value suggests underperformance.

This measure is particularly useful for investors seeking to assess the value added (or detracted) by active portfolio management, making choice B accurate in stating that Jensen's alpha shows the difference between realized return and required return.

Contextually, positive alpha does not imply consistent underperformance; it actually implies the opposite for statement A. The statement regarding the Sharpe ratio emphasizes that it is a valid measure even for non-diversified portfolios, particularly as it assesses risk-adjusted return over total risk. Lastly, while the Treynor ratio does indicate the performance relative to market risk, it is not solely an indicator of whether a manager has outperformed the market; rather, it evaluates performance with respect to systematic risk. Thus, choice B is indeed the correct statement regarding performance measures.

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