Portfolio Management Flashcards

A portfolio earned 12% with a standard deviation of 20% while the risk-free rate was 2%. What is its Sharpe ratio?

Answer: 0.50

Sharpe = (12% - 2%) / 20% = 0.50.

Which performance measure divides a portfolio's excess return by its beta rather than its standard deviation?

Answer: Treynor ratio

The Treynor ratio measures excess return per unit of systematic risk, which is beta.

A portfolio returned 11% with a beta of 1.2; the risk-free rate is 3% and the market returned 9%. What is Jensen's alpha?

Answer: 0.8%

CAPM expected return = 3% + 1.2(9% - 3%) = 10.2%, so alpha = 11% - 10.2% = 0.8%.

The information ratio is best described as:

Answer: Active return divided by tracking error

The information ratio measures active return per unit of active risk (tracking error).

What does M-squared (M²) measure?

Answer: The portfolio's return after adjusting its risk to match the market's standard deviation

M² scales the portfolio with borrowing or lending at the risk-free rate so its volatility equals the market's, giving a return directly comparable to the market.

How does the Sortino ratio differ from the Sharpe ratio?

Answer: It penalizes only downside volatility below a target return

The Sortino ratio replaces total standard deviation with downside deviation, so upside volatility is not penalized.

A portfolio holds 60% in a fund with beta 1.5 and 40% in a fund with beta 0.5. What is the portfolio beta?

Answer: 1.10

Portfolio beta = 0.6(1.5) + 0.4(0.5) = 0.90 + 0.20 = 1.10.