Summary
One of the basic tenets of finance is that riskier assets should have a higher expected return, as investors would not be willing to take on the additional risk unless they were rewarded appropriately. A common goal of many investors or traders is to generate as high a return as possible with the least amount of risk taken. Many different measures can be used to determine a portfolio’s risk-adjusted performance, including Jensen’s alpha, the Sharpe Ratio, and the Treynor Measure. Jensen’s alpha, or ex-post alpha, is determined by taking the current portfolio return and subtracting the expected return according to the Capital Asset Pricing Model (CAPM).