Risk-adjusted performance evaluation: Sharpe, Treynor, and Jensen's Alpha (Excel) (SUB)

Does simply achieving higher returns make one a better investor?

When humans are risk-averse, that is not necessarily the case. Today we are discussing some of the simplest and widely known risk-adjusted return measures such as Sharpe ratio, Treynor ratio, and Jensen's alpha and how they can be used to compare the performance of portfolios with varying levels of risk.

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[aditiware]

I have watched many videos related to calculating Sharpe ratios, this is one of the best video till now. He is actually showing how to calculate the standard deviation. Thank you so much.

[becalmrelaxandsleepwell]

This is the best video I have seen on this subject, breaks it down with very logical explanations. Thank you

[kefeizhang]

Please keep on doing more videos!! They’re really helpful!

[schewiloffel]

Great Video! really helped me writing my bachelor thesis!

[sunitamalik]

Super helpful video for my CFA exam, thankyou!

[piyushkakkar]

thanks dude !! great video, looking forward for more of it!

[jpf]

Thank you @NEDL. I found your explanations to be very helpful.

[kamillamirodilova]

Thank you so much for doing these videos, they help a lot!

[MrBorhanseti]

I think we should calculate the annualized return and risk based on Excess return to reflect the risk-adjusted returns ? right ? otherwise, what is purpose of calculating excess return ?

[Diegoblismartmedpengar]

why you didn’t use geometrical mean for risk free return? And why you didn’t use excess return to compute annualized return? And lastly why you didn’t use =geomean instead of =product …? Haha many questions I know, appreciate your time for these questions.

[raydespoir]

Thanks for the video, it was great! Two questions though.

1. For the annualized risk-free rate, you used the annual bond yield for the first period of 4.02%. Alternatively, one could also use the current risk-free rate for the bond correct? Or what about if I wanted to compare how well the investment did compared to the maximum that the risk-free rate ever was? Are there any downsides/risks with these two approaches?

2. In column E, you have the U.S. 10-year bond yield. However, your data is returning the data on a monthly frequency, whereas I have it on a daily frequency. If I want to take the average of Column E and use that as my value for the annual risk-free rate, do I need to do anything to the formula? If I wanted to use the product 1+ function, would I use the following formula: =product(1+annual return)^(1/n), would n be the number of years of data I have or the number or data points since I have a daily frequency?

Thanks again for your help!

[badhombre]

Dude you are a beast, thank you so much.

[littlebigfis]

thanks for the great video. Why use the S&P benchmark for the bond portfolio? Why not use a bond benchmark?

[ОльгаГапоненко-зщ]

Hi Thanks for video! Please, clarify: what option is better? the 1st one or the 2nd? Sharp ratio is more for option 1, Treynor and Alpha are more for option 2.

[StanMW]

Great video! I have a question: I have annualized (monthly) returns over a period of 5 years for index funds.
Say the annualized return is 10%, the risk free is 1, 2%, and the standad deviation is 4%. That gives a sharpe ratio of 2, 2. Does this make sense? I'm getting some crazy sharpe ratios for the funds I'm analyzing. Perhaps the risk free is wrong or something? The standard deviation is so low because (presumably) index funds have low risk.

[sad-veg]

Thanks mate! This video has been really helpful for my project :))))

[likithcr]

Thanks a lot brother you made my life easy

[Diegoblismartmedpengar]

Great video and very easy explained! Thank you for these videos they are very helpful.

I was thinking if it is still possible to attain Jensens alpha or the tracking error by only using annum return for both the mutual fund and the s&p500 or does it have to be monthly data?

And if the latter is the case do you perhaps have a hint of where I can find monthly data for the returns or price of the mutual fund and S&P 500 I cannot seem to find it on yahoo finance or at Morningstar.

Thank you for you answer!

[neoramodike]

Hi, thanks for the great video. Just to make sure my calculations are correct, would the annualised return over 3 years be calculated as = PRODUCT(1 + all the yields)^(1/3) - 1? Moreover, to annualise the risk would i multiply the array by the Sqrt(12) or Sqrt(3)?

[gozde]

hi, thank you for your explanation. I have two question. What formula converts the monthly risk free rate to the daily rate? And, Is beta calculated on Treynor ratio, index return or excess return?