Portfolio Performance Evaluation Risk/Return Measures

	Type of risk measure	Advantages	Comments	Comments 2
Sharpe Ratio	Total Risk		Assumes normally distributed returns, based on the CAPM, slope of the CML	Biased upwards for hedge funds Uses portfolio total risk instead of systematic risk
Sortino Ratio	Total Risk	Good for hedge funds Good for assets with skewed distribution of returns	Improves on the Sharpe Ratio that penalizes for good performance which is incorporated in the up side deviation
Information Ratio (Appraisal Ratio)	Total Risk	Used to measure active performance of mutual funds	Higher information ratio (0.4-0.6) is considered better. The index has zero IR	IR = active return/active risk IR = IC x BR ^ (0.5)
Jensen’s alpha	Systematic	Used frequently to evaluate mutual fund performance	Based on the CAPM
Treynor	Systematic	Overcomes the Sharpe ratio limitation that it uses total risk	Slope of the SML
M squared	Total Risk	The Sharpe ratio is awkward to interpret when it is a negative value. M squared is always positive.	A skillful manager will generate an M2 greater than the return on the market	Rf + SR of asset x Market STD. M^2 measure ranks in agreement with the Sharpe ratio