The risk-free rate is currently 8.1%. Use the data in the accompanying table for the Fio family’s portfolio and the market portfolio during the year just ended to answer the questions that follow. Data Item Fio’s Portfolio Market Portfolio Rate of return 12.8% 11.2% Standard deviation of return 15.5% 9.6% Beta 1.10 1.00 Calculate Sharpe’s measure for the portfolio and the market. Compare the two measures, and assess the performance of the Fios’ portfolio during the year ended. Calculate Treynor’s measure for the portfolio and the market. Compare the two measures, and assess the performance of the Fios’ portfolio during the year ended. Calculate Jensen’s measure. Use it to assess the performance of the Fio’s portfolio during the just ended.

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Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.