Total risk=systematic+un systematic then why this
Q. Which of the following performance measures is most appropriate for an investor who is not fully diversified?
- M-squared.
- Treynor ratio.
- Jensen’s alpha.
Solution
Solution
A is the correct. M-squared adjusts for risk using standard deviation (i.e., total risk).
The correct answer is M-squared because here we compare risk that portfolio manager took for generating extra return over RF by taking risk other then market risk; (Rp-Rf/SD of portfolio)*(S.D of market). Therefore we can conclude that he was not fully diversified otherwise he used have used market risk. So accordingly M-squared is appropriate for investor who is not fully diversified.