Measurement of Risk-Adjusted Return
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Explain the expected risk-adjusted return for an investment using the Capital Asset Pricing Model.
- Calculate the expected risk-adjusted return for an investment using the Capital Asset Pricing Model.
- Interpret the expected risk-adjusted return for an investment using the Capital Asset Pricing Model.
- Define measurements of risk-adjusted return, such as:
- Sharpe Ratio
- Treynor Ratio
- Jensen Index
- Identify when the use of each measurement of risk-adjusted return is appropriate.
- Explain each of the measurements of risk-adjusted return.
- Interpret each of the measurements of risk-adjusted return.
- Define a benchmark.
- Identify characteristics of a benchmark, such as:
- Same risk as the portfolio.
- Specified in advance
- Objectively constructed
- Easily measureable
- Identify benchmarks that realized returns may be compared with in assessing performance, such as:
- Market indices
- Other similarly constructed investments
- Required rate of return to meet goal
- Compare the risk-adjusted return of an investment to the risk-adjusted return of its benchmark.
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