For this last milestone, you will first complete your portfolio by comparing the risk/return trade-off on the investments you are compiling. Then, as part of the beginning of your executive summary,...

XYZ Tech Company 3        1
Risk Return Trade-off
Brock Haner
Southern New Hampshire University
Executive Summary
The risk return trade-off analysis will help XYZ Tech Company to get a report of whether the investment made by them in a portfolio of stocks compared to the market such as S&P 500 and Dow Jones are providing a good and expected return or not. This will also help them discard the stocks which are performing poorly and emphasize on purchasing some other stocks which can enhance the portfolio’s return. For this we have considered the three ratios Sharpe’s, Treynor’s and Jensen’s Alpha to determine the performances of the individual stock in relation to the stock market.
Sharpe Ratio: It considers the total risk of the portfolio by considering standard deviation of returns rather than considering only beta which is the measurement of systematic risk of a portfolio. Hence, Sharpe’s ratio is the appropriate measure of performance for an overall portfolio particularly when it is compared to another portfolio or another index such as S&P 500 or Dow Jones. A high and positive Sharpe’s ratio shows a superior risk adjusted performance of a fund while a low and negative ratio indicates a stocks unfavourable performance.
Formula: Sharpe Ratio = Portfolio Return – Rf, σp is the standard deviation of the portfolio
                 σp
Treynor Ratio: It is almost similar to Sharpe’s ratio except it uses beta instead of standard deviation to measure the risk return trade-off. It is a measure of the fund average excess return to that of the fund’s beta. It is a measure of the return earned in excess to the return earned on a risk free investment (Rf). A higher beta means that the portfolio has higher risk and is more sensitive to the market returns.
Formula: Treynor Ratio = Portfolio Return – Rf, ßp is the beta of the portfolio
                 ßp
Jensen’s Alpha: Jensen’s Alpha represents the ability of the fund manager – “XYZ Tech Company” to achieve a return that is above what could be expected given the risk in the fund. This ratio is an absolute measure as opposed by Sharpe and Treynor ratio. It is the difference between the actual return posted by the firm and the return posted by a benchmark portfolio with the same risk which is beta. Positive alpha’s represents good performance by the fund management company while a negative alpha reflects poor performance of the fund managing company.
Formula: Jensen’s Alpha = α = Ri – [Rf + ß (Rm – Rf)]
Assumptions:
Dow Jones and S&P 500 Returns have been calculated based on the average returns from 2016 to 2020.
Risk free rate for Dow Jones and S&P 500 is assumed as 3.14%....