Framework
Risk-adjusted performance measures
The question it answers
When choosing between two funds, how can an investor tell whether the one with higher returns owes it to the manager's skill or simply to taking more risk?
- Origin
- Sharpe (1966); Treynor (1965); Jensen (1968); Sortino and Price (1994); Modigliani and Modigliani (1997)
- Diagram type
- Comparison table
- Level of analysis
- Individual
- Topics
- Corporate finance
Diagram
Risk-adjusted performance measures
| Criterion | Risk used | Reads as |
|---|---|---|
| Sharpe ratio | Total risk | Excess return per unit of volatility |
| Treynor ratio | Beta | Excess return per unit of market risk |
| Jensen's alpha | Beta | Return above CAPM |
| Sortino ratio | Downside deviation | Penalises only losses |
| M² | Total risk | Return restated at market volatility |
Sources
References
Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.
- Jensen, M.C. (1968) ‘The performance of mutual funds in the period 1945–1964’, Journal of Finance, 23(2), pp. 389–416.doi:10.1111/j.1540-6261.1968.tb00815.xSource page
- Modigliani, F. and Modigliani, L. (1997) ‘Risk-adjusted performance’, Journal of Portfolio Management, 23(2), pp. 45–54.doi:10.3905/jpm.23.2.45Source page
- Sharpe, W.F. (1966) ‘Mutual fund performance’, Journal of Business, 39(1, Part 2), pp. 119–138.doi:10.1086/294846Source page
- Sortino, F.A. and Price, L.N. (1994) ‘Performance measurement in a downside risk framework’, Journal of Investing, 3(3), pp. 59–64.doi:10.3905/joi.3.3.59Source page
- Treynor, J.L. (1965) ‘How to rate management of investment funds’, Harvard Business Review, 43(1), pp. 63–75.No DOISource page