Question

What are the 5 Technical Risk Ratios used in MPT?

Answer 1

The five technical risk ratios used in Modern Portfolio Theory (MPT) are:

1. Alpha (α): Measures the performance of an investment against a market index or other benchmark which represents the market's movement as a whole.

2. Beta (β): Measures the volatility of an investment. It represents the tendency of a security's returns to respond to swings in the market.

3. Standard Deviation (σ): Measures the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation.

4. R-squared (R2): Measures the relationship between a portfolio and its benchmark. It can be interpreted as the proportion of the variance for a dependent variable that's explained by an independent variable.

5. Sharpe Ratio: Measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is the average return earned in excess of the risk-free rate per unit of volatility or total risk.

Step-by-step explanation:

Answer 2

The five Technical Risk Ratios in Modern Portfolio Theory (MPT) include Alpha, Beta, Sharpe Ratio, Standard Deviation, and R-squared. They are essential for assessing performance and risk compared to the market and for making informed investment decisions.

Step-by-step explanation:

The five technical risk ratios used in Modern Portfolio Theory (MPT) are:

• Alpha: Measures the performance of an investment compared to a benchmark index.
• Beta: Assesses the volatility of an investment in relation to the market.
• Sharpe Ratio: Evaluates the risk-adjusted return of an investment portfolio.
• Standard Deviation: Quantifies the dispersion of returns of an investment.
• R-squared: Reflects the percentage of an investment's movements that are explained by movements in a benchmark index.

These ratios are crucial for investors who follow MPT, as they provide a framework for assessing the performance and risk of an investment relative to the broader market. Proper understanding of these ratios is essential for making informed investment decisions and constructing a diversified portfolio.