Question

What is the comparison and contrast between the performance measures:

- Fama's Nert selectivity measure vs Sharpe ratio, Treynor Ratio and Jensens Alpha ratio

Answer 1

Fama Nert Selectivity Measure helps in identifying the extra return over market return  that can be obtained by selecting a portfolio which has same systemic risk.
FNS = E(Rp) - Risk free rate - (E(Rp) - Risk free rate)* Standard Deviation of portfolio/Standard Deviation of market
Drawback: The value depends on how effectively the portfolio is selected.

Whereas Sharpe ratio is the excess return of portfolio over risk free rate dividend by standard deviation of portfolio.

Sharpe Ratio = (Expected Return - Risk free Rate)/ Standard Deviation
Here it is used to identify the return to risk ratio and help in choosing portfolio with high return to risk ratio.

Treynor Ratio and Jensens Alpha ratio

Tenynor Ratio is the ratio of excess return of portfolio over risk free rate divided by systematic risk(beta)
Treynor Ratio = (Expected Return - Risk free Rate)/ Beta
Its accuracy is dependent on beta and on historical data

Jensens Alpha ratio is the excess return by portfolio over the return calptured by capm model

If it is positive the portfolio has exceeded Capm returns,

Alpha = R(i) - (R(f) + B x (R(m) - R(f)))

Please Discuss in case of Doubt

Best of Luck. God Bless
Please Rate Well