Business Risk-Adjusted Return Guide
Measures, steps, factors, and applications.
Performance Measures
Sharpe ratio
Formula: (Return - Risk-free)/Std dev
Interpretation: Risk efficiency
Treynor ratio
Formula: (Return - Risk-free)/Beta
Interpretation: Market risk efficiency
Jensen alpha
Formula: Actual - Expected return
Interpretation: Excess performance
Information ratio
Formula: Active return/Tracking error
Interpretation: Manager skill
Calculation Steps
1. Calculate portfolio return
2. Determine risk-free rate
3. Measure portfolio volatility
4. Calculate beta coefficient
5. Compute Sharpe ratio
6. Compute Treynor ratio
7. Calculate Jensen alpha
8. Calculate information ratio
9. Compare to benchmarks
10. Interpret risk-adjusted performance
Key Factors
Return volatility
Impact: Risk measure
Consideration: Standard deviation
Market correlation
Impact: Beta measure
Consideration: Systematic risk
Time period
Impact: Calculation accuracy
Consideration: Appropriate horizon
Benchmark selection
Impact: Relative performance
Consideration: Proper comparison
Common Applications
1. Portfolio evaluation
2. Manager selection
3. Investment comparison
4. Performance attribution
5. Risk management
6. Strategy assessment
7. Asset allocation
8. Fund ranking
Risk-Adjusted Return Checklist
1. Calculate portfolio return accurately. 2. Determine risk-free rate correctly. 3. Measure portfolio volatility precisely. 4. Calculate beta coefficient accurately. 5. Compute Sharpe ratio properly. 6. Compute Treynor ratio correctly. 7. Calculate Jensen alpha precisely. 8. Calculate information ratio properly. 9. Compare to benchmarks fairly. 10. Interpret performance objectively. Risk-adjusted return = true performance. Return calculated. Risk-free determined. Volatility measured. Beta calculated. Sharpe computed. Treynor computed. Alpha calculated. Information computed. Benchmarks compared. Performance interpreted.