Which one of the following statements is correct?

Which one of the following statements is correct?

• A. Jensen's alpha may be used by itself to judge an investment.
• B. The Treynor ratio uses standard deviation as its measure of risk.
• C. The Sharpe ratio uses beta as its measure of risk.
• D. A negative alpha indicates the investment lost money.

Answer: (A)

Jensen's alpha is an important measure in performance evaluation, particularly in the context of portfolio management. It helps to assess the relative performance of an investment compared to a benchmark, while adjusting for risk. Specifically, Jensen's alpha reflects the abnormal return generated by an investment, accounting for the risk taken, typically measured by beta. While Jensen's alpha can provide valuable insight into whether an investment is outperforming or underperforming its expected return based on its level of systematic risk (as represented by its beta), it's important to note that it should not be relied on in isolation. Investors typically consider it alongside other performance metrics, as it does not provide a complete view of an investment's overall quality or risk profile. Therefore, while this choice states that Jensen's alpha may be used by itself to judge an investment, it's essential for investors to understand its limitations and utilize it in conjunction with other measures for a comprehensive evaluation. Considering the other options, they misrepresent key concepts in portfolio performance evaluation. The Treynor ratio actually uses beta to assess the risk taken per unit of return, rather than standard deviation. The Sharpe ratio evaluates performance based on the excess return per unit of risk, using standard deviation as its measure of risk, not beta. Lastly

Jensen's alpha is an important measure in performance evaluation, particularly in the context of portfolio management. It helps to assess the relative performance of an investment compared to a benchmark, while adjusting for risk. Specifically, Jensen's alpha reflects the abnormal return generated by an investment, accounting for the risk taken, typically measured by beta.

While Jensen's alpha can provide valuable insight into whether an investment is outperforming or underperforming its expected return based on its level of systematic risk (as represented by its beta), it's important to note that it should not be relied on in isolation. Investors typically consider it alongside other performance metrics, as it does not provide a complete view of an investment's overall quality or risk profile. Therefore, while this choice states that Jensen's alpha may be used by itself to judge an investment, it's essential for investors to understand its limitations and utilize it in conjunction with other measures for a comprehensive evaluation.

Considering the other options, they misrepresent key concepts in portfolio performance evaluation. The Treynor ratio actually uses beta to assess the risk taken per unit of return, rather than standard deviation. The Sharpe ratio evaluates performance based on the excess return per unit of risk, using standard deviation as its measure of risk, not beta. Lastly