{"id":111246,"date":"2021-02-27T13:51:42","date_gmt":"2021-02-27T08:21:42","guid":{"rendered":"https:\/\/www.vskills.in\/certification\/tutorial\/?page_id=111246"},"modified":"2024-04-12T14:31:24","modified_gmt":"2024-04-12T09:01:24","slug":"jensons-alpha-and-treynor-ratio","status":"publish","type":"page","link":"https:\/\/www.vskills.in\/certification\/tutorial\/jensons-alpha-and-treynor-ratio\/","title":{"rendered":"Jenson\u2019s Alpha and Treynor ratio"},"content":{"rendered":"\n<p>The Jensen measure: This is the ratio of the portfolio\u2019s return less the portfolio\u2019s expected return as determined by the capital asset pricing model, or CAPM. The CAPM is an economic theory that describes the relationship between risk and the pricing of assets. The CAPM theory suggests that the only risk that is priced by investors is risk that cannot be diversified away. The CAPM in its most simple form shows that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus the asset\u2019s risk premium multiplied by the asset&#8217;s beta. The Jensen\u2019s measure incorporates the CAPM into its calculation. The Jensen measure is calculated as follows.<\/p>\n\n\n\n<p>Rp&nbsp;= Rf&nbsp;+ (RMI&nbsp;\u2013 Rf) x \u03b2<\/p>\n\n\n\n<p>Where,<\/p>\n\n\n\n<p>Rp&nbsp;= Return on portfolio<\/p>\n\n\n\n<p>RMI&nbsp;= Return on market index<\/p>\n\n\n\n<p>Rf&nbsp;= Risk free rate of return<\/p>\n\n\n\n<p>This measure is the ratio of the portfolio\u2019s performance (rp) less the expected portfolio return as determined by CAPM or [rf&nbsp;+ \u00dfp&nbsp;(rm&nbsp;\u2013 rf)].<\/p>\n\n\n\n<p>This measure by itself is sufficient to determine risk-adjusted performance. Since it is known that the market\u2019s beta is 1.0 (by definition), and since the risk-free rate is both added and subtracted, the CAPM return is just the market return. Hence, if the Jensen\u2019s measure is positive, the asset has outperformed on a risk-adjusted basis.<\/p>\n\n\n\n<p>The Treynor measure is calculated dividing the portfolio risk premium by the portfolio risk as measured by the beta. An asset\u2019s Treynor measure also must be measured against the market\u2019s Treynor measure, which is calculated by dividing the market risk premium or the return on the market minus the risk-free rate by the beta of the market, which is 1.0. If the asset\u2019s Treynor measure is greater than the market\u2019s Treynor measure, the asset has outperformed on a risk-adjusted basis.<\/p>\n\n\n\n<p>Like the Sharpe ratio, the Treynor ratio can be interpreted as the &#8220;quality&#8221; of portfolio return for the given level of risk but risk measured on a CAPM theory basis.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Apply for Hedge Fund Certification!<\/strong><\/h3>\n\n\n\n<p><a href=\"https:\/\/www.vskills.in\/certification\/certified-hedge-fund-manager\">https:\/\/www.vskills.in\/certification\/certified-hedge-fund-manager<\/a><\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><a href=\"https:\/\/www.vskills.in\/certification\/tutorial\/certified-hedge-fund-manager\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>Back to Tutorials<\/strong><\/a><\/h4>\n","protected":false},"excerpt":{"rendered":"<p>The Jensen measure: This is the ratio of the portfolio\u2019s return less the portfolio\u2019s expected return as determined by the capital asset pricing model, or CAPM. The CAPM is an economic theory that describes the relationship between risk and the pricing of assets. The CAPM theory suggests that the only risk that is priced by&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-111246","page","type-page","status-publish","hentry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Jenson\u2019s Alpha and Treynor ratio - Tutorial<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.vskills.in\/certification\/tutorial\/jensons-alpha-and-treynor-ratio\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Jenson\u2019s Alpha and Treynor ratio - Tutorial\" \/>\n<meta property=\"og:description\" content=\"The Jensen measure: This is the ratio of the portfolio\u2019s return less the portfolio\u2019s expected return as determined by the capital asset pricing model, or CAPM. 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