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Sharpe Ratio: ( William Sharpe)

Return from Investment Risk free return Standard deviation of the investment.

e.g.Scheme A: Return 18% Std. dev. 1.2 Scheme B: Return 30% Std. dev. 1.5 Assume risk free return to be 6% Sharpe ratio: Scheme A: ? Scheme B: ? Higher the better performer as it has higher risk premium for every unit of standard deviation. Ideally useful for Individual investors with mixed portfolio As it covers total risk and not just market risk.

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Treynor Ratio (Jack Treynor) Return from investment risk free return Beta of the investment. Higher the ratio better the risk- reward for the investor. Beta is empirically tested for equity, hence not suitable for debt schemes. Ideal for large institutional investors with diversified portfolio

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Jensen Alpha ( expected return based on beta) Risk free return + Beta x Risk premium Suppose the market has gone up from 4000 to 4400( growth 10%) and beta of a scheme is 1.2 and risk free return is 6% Expected return:6% + 1.2 x ( 10% - 6%) = 10.8% If actual return is 15% then Alpha is 4.2% Ideal for diversified equity portfolio with nil nonsystematic risk. INDEX OF FUND MANAGERS PERFORMANCE

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Eugene Fama: Risk free return + Std. dev. x Risk premium Positive Eugene Fama ratio means fund managers performance is better than what is expected based on scheme's total risk as measured by standard deviation.

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Treynor Black appraisal ratio: Jenson Alpha divided by scheme's unsystematic risk. If unsystematic risk is 0.2 and Jenson Alpha is 4.2% then Treynor-Black appraisal ratio is 4.2% / 0.2 =21% Higher the ratio better is the fund managers performance

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M-square ( Franco and Lea) (SD of market SD of scheme) x ( Return on the scheme - Risk free return) + Risk free return If market has moved from 4000 to 4400 and If scheme returns are 15% and risk free return is 6% and SD of scheme and market is 1.5 and 1 respectively
M-square=( 11.5) x ( 15% - 6%) + 6%=12% As this is better than market return of 10%(growth) The scheme has performed better .

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Using the performance measures is more an art than a science and hence increases subjectivity. If scheme is diversified-use Treynor and jenson Alpha ratios. If scheme is non-diversified use sharpe, eugen fama or M-square ratios. Agencies to assist- CRISIL, Value Research, and AMC reports.

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SORTINO RATIO:S=(R-T)/DV R = Asset or Portfolio return T = Minimum Acceptable Return DV = Downside-Volatility The ratio is more meaningful than Sharpe Ratio when there is marked downside volatility.