Classical Portfolio Performance Measures: A Primer
47 Pages Posted: 9 Feb 2020 Last revised: 26 May 2020
Date Written: May 25, 2020
In this primer, we review the classical methods for assessing the performance of a financial portfolio. The analysis relies on benchmarking the return on the portfolio with that of a peer group. We define and discuss the pros and cons of four performance metrics that are theoretically consistent with the CAPM and widely used in the industry: The Sharpe Ratio, the Treynor Ratio, Jensen’s alpha, and the Information Ratio. We examine the practical as well as the statistical significance of these measures in the case where the returns on the underlying assets are i.i.d. Gaussian. Numerical implementation of these methods is illustrated through a simplified, yet realistic example.
Keywords: Portfolio Performance, Sharpe Ratio, Jensen's alpha, Treynor Ratio, Information Ratio, Peer Group Comparison
JEL Classification: G11, G12, G14, C12, B26
Suggested Citation: Suggested Citation