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What are the 5 Technical Risk Ratios used in MPT?

1) β, Standard Deviation, Sharpe Ratio, Treynor Ratio, Sortino Ratio
2) α, R-Squared, Sharpe Ratio, Jensen's α, Sortino Ratio
3) β, R-Squared, Standard Deviation, Treynor Ratio, Jensen's α
4) α, Standard Deviation, Sharpe Ratio, Treynor Ratio, Sortino Ratio

1 Answer

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Final answer:

The correct 5 Technical Risk Ratios in MPT are beta, R-Squared, Standard Deviation, Treynor Ratio, and Jensen's alpha. These ratios evaluate different aspects of an investment's performance, including volatility, systematic risk, and risk-adjusted returns.

Step-by-step explanation:

The five Technical Risk Ratios used in Modern Portfolio Theory (MPT) are beta (β), R-Squared, Standard Deviation, Treynor Ratio, and Jensen's alpha (α). Beta measures the volatility or systematic risk of a security or portfolio in comparison to the market as a whole. R-Squared indicates the percentage of a fund or security's movements that are explained by movements in a benchmark index. Standard Deviation is a measure of the dispersion of a set of data from its mean, which in finance, is used to gauge the amount of expected volatility. The Treynor Ratio is similar to the Sharpe Ratio, but instead of using Standard Deviation, it uses beta as the denominator to evaluate the risk-adjusted return of an investment portfolio. Finally, Jensen's alpha measures the average return on the portfolio over and above that predicted by the Capital Asset Pricing Model (CAPM), given the portfolio's beta and the average market return.

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