# Quiz: Jensen's Alpha

If the AM Growth Fund is considered to be well-diversified, which measure would be more appropriate in evaluating its risk/return performance? A) The Treynor measure. B) The Sharpe ratio. C) Jensen’s Alpha measure.

I would say A.

Me 2. Why C is wrong?

Sharpe Ratio and Jensen’s Alpha considers Total Risk(Systematic Risk and + Unsystematic Risk). AM considers only systematic risk(Well-Diversified), Treynor Measure is appropriate.

overdope Wrote: ------------------------------------------------------- > Sharpe Ratio and Jensen’s Alpha considers Total > Risk(Systematic Risk and + Unsystematic Risk). > AM considers only systematic > risk(Well-Diversified), Treynor Measure is > appropriate. I tot Jensen’s is the same as Treynor, which only takes Beta, systematic risk?

overdope Wrote: ------------------------------------------------------- > Sharpe Ratio and Jensen’s Alpha considers Total > Risk(Systematic Risk and + Unsystematic Risk). > AM considers only systematic > risk(Well-Diversified), Treynor Measure is > appropriate. Jensen’s alpha measures excess return given systematic risk, beta, of the portfolio but Treynor measures unit excess return per systematic risk taken. Jensen’s provides the total alpha (excess return) generated.

Agree with Tega

A

A

Lol… Why is this quiz called Jensen’s alpha A

ole give away the punchline before the joke

If the portfolio is well diversified, Then Total risk should be approximately equal to systematic risk. I assume all three should be the same.

Xtra Wrote: ------------------------------------------------------- > Lol… Why is this quiz called Jensen’s alpha > > > A Because choosing A is easy, but why C is wrong?

hellscream Wrote: ------------------------------------------------------- > Xtra Wrote: > -------------------------------------------------- > ----- > > Lol… Why is this quiz called Jensen’s alpha > > > > > > A > > > Because choosing A is easy, but why C is wrong? I had that same question and thought the same thing. Schweser gave a great reason that it was Treynor was risk adjusted. I guess subtracting out Beta(MKT - RFR) provides more information than dividing by beta on risk. The more you read the CFA curriculum the more you realize Schweser has not been updated in a long time and their interpretations are just that interpretations of the problems.

If it is well diversified then no difference between A or B, and even C should be close. SO all three are the same

aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

I think the idea here is to choose the BEST answer. Yes, the Treynor Ratio and Jensen’s Alpha both use Beta and both basically tell you the same thing, which is a risk adjusted return. But the question is asking us which is most appropriate for evaluating “risk/return performance” So the measure we are looking for is a ratio of risk/return or return/risk. Jensen’s Alpha is not a ratio, but the Treynor Ratio is. Treynor is giving us the return per unit of systematic risk. So because Treynor is a ratio, A is a BETTER answer than C. As for answer B, I don’t think we can assume there is no systematic risk despite the description of the fund as “well-diversified.” I may be wrong, but I don’t think we can ever formally say that ALL non-systematic risk has been diversified away…unless we are holding all securities in the market.

Why it is not a sharp ratio …if all unsyst risks are diversified …so the sharp ratio should equal Treynor ratio …right?

You can’t use the Sharpe Ratio for the reason I stated earlier: I don’t think we can ever formally say that ALL non-systematic risk has been diversified away. So even though the fund is well diversified, it still has some small amount of non-systematic risk. So Sharpe is inappropriate here.

Jensen gives no sense of scale? Only an alpha, but we don’t know whether the alpha was generated over a low beta or high beta?