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Sem 5 Prep
← Money & BankingFund performance, insurance and pensions

Formulas for this chapter

Sharpe ratio

Sharpe ratio = (Rp - Rf) / sigma_p

Evaluating an entire portfolio, because it measures total risk and therefore penalises a portfolio for being undiversified.

Rp
Portfolio return over the period
Rf
Risk-free rate
sigma_p
Standard deviation of the portfolio's return, that is total risk

Treynor ratio

Treynor ratio = (Rp - Rf) / beta_p

Evaluating a security or portfolio for possible inclusion into an existing portfolio, where specific risk will be diversified away and only systematic risk matters.

beta_p
Portfolio beta, measuring systematic risk only

Jensen's alpha

alpha_p = Rp - [ Rf + beta_p (E(RM) - Rf) ] = actual return - CAPM risk-adjusted predicted return

To say by how much a portfolio beat the market after adjusting for the risk it took. Build the CAPM prediction first; subtracting the market return instead is the standard error.

E(RM)
Expected or realised market return
E(RM) - Rf
Market risk premium

NPS withdrawal at 60

Maximum tax-free lump sum = 60% of corpus Minimum annuity purchase = 40% of corpus Equity cap in auto choice = 75%

Any NPS numerical. The 60% is a maximum and the 40% a minimum, so a subscriber may annuitise more but never less.

corpus
Accumulated value of the Tier I account at retirement
Step 1 of 28
The ideaTheory

Two drivers, same destination

Two people drive from Bodh Gaya to Patna in three hours. One kept to 60 and stayed in lane. The other hit 140 and overtook on blind corners.

Same result. Not the same driving. Judging them by arrival time alone would be silly.

A fund's return is the arrival time. The three measures in this chapter divide that return by a measure of how recklessly it was earned.

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