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In finance, Jensen's alpha [1] (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. It is a version of the standard alpha based on a theoretical performance instead of a market index .
In finance, the Treynor reward-to-volatility model (sometimes called the reward-to-volatility ratio or Treynor measure [1]), named after American economist Jack L. Treynor, [2] is a measurement of the returns earned in excess of that which could have been earned on an investment that has no risk that can be diversified (e.g., Treasury bills or a completely diversified portfolio), per unit of ...
Michael Cole Jensen (November 30, 1939 – April 2, 2024) was an American economist who worked in the field of financial economics. From 1967-1988, he was on the University of Rochester's faculty. [ 1 ]
Sharpe ratio; Treynor ratio; Jensen's alpha; Optimization models Markowitz model; Treynor–Black model; ... and computer science, and learn finance "on the job ...
For example, what does it mean if one investment has a Sharpe ratio of 0.50 and another has a Sharpe ratio of −0.50? How much worse was the second portfolio than the first? These downsides apply to all risk-adjusted return measures that are ratios (e.g., Sortino ratio, Treynor ratio, upside-potential ratio, etc.).
Sharpe ratios, along with Treynor ratios and Jensen's alphas, are often used to rank the performance of portfolio or mutual fund managers. Berkshire Hathaway had a Sharpe ratio of 0.79 for the period 1976 to 2017, higher than any other stock or mutual fund with a history of more than 30 years.
A stock picking rule of thumb for assets with positive beta is to buy if the Treynor ratio will be above the SML and sell if it will be below (see figure above). Indeed, from the efficient market hypothesis, it follows that we cannot beat the market. Therefore, all assets should have a Treynor ratio less than or equal to that of the market.
Jack Lawrence Treynor (February 21, 1930 – May 11, 2016) was an American economist who served as the President of Treynor Capital Management in Palos Verdes Estates, California. He was a Senior Editor and Advisory Board member of the Journal of Investment Management , and was a Senior Fellow of the Institute for Quantitative Research in Finance .