MC9901C03 Lecture Notes - Lecture 1: Sharpe Ratio, Risk Premium, Systematic Risk
2 Mar 2022
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Document Summary
Initially, the performance evaluation of portfolios was done entirely by a manager who was aware of the risk associated with the return, but they did not know how to quantity risk, so they could not consider it explicitly. Portfolio evaluation has evolved dramatically since the early 1960s. The developments enabled the investors to quantify risk in terms of variability of returns, but there was still no composite measure and both the factors were considered separately. Sharpe, treynor, jensen, and others have developed models for portfolio evaluation that take into consideration both risk and return of the portfolio. This article deals with evaluating portfolio performance based on sharpe"s reward to variability model. Sharpe"s model follows closely from the author"s earlier work on capm. This model yields a single value that can be used for investment performance rankings. It assigns the highest rank portfolio that has the best risk-adjusted rate of return; his measures measure the risk of portfolios.
