Which of the following performance measures is the most rigorous risk-adjustment process separating systematic and unsystematic risk?
A) Treynor ratio
B) Sharpe ratio
C) Jensen's Alpha
D) Information ratio
E) None of the above

Question

Quizplus · Accepted Answer

Jensen's Alpha is the most rigorous risk-adjustment process as it separates systematic and unsystematic risk. It calculates the excess return of the portfolio over the expected return based on the portfolio's beta (systematic risk), which is a measure of its correlation with the market. The excess return that cannot be explained by the portfolio's beta represents the portfolio's alpha, which is the manager's skill in generating returns from unsystematic risk. Treynor ratio and Sharpe ratio only measure risk-adjusted return based on systematic risk, while Information ratio measures risk-adjusted return based on active risk.

Which of the Following Performance Measures Is the Most Rigorous