Which risk measure reflects unexpected performance?

Which risk measure reflects unexpected performance?

• A. Alpha
• B. Beta
• C. Sharpe ratio
• D. Standard deviation

Answer: (A)

The measure that reflects unexpected performance is Alpha. Alpha is a metric used to evaluate the excess return of an investment relative to a benchmark, typically after accounting for the risk taken. It essentially indicates how well an investment or portfolio has performed compared to a market index, with a positive Alpha suggesting outperformance and a negative Alpha indicating underperformance. Alpha is particularly useful in assessing the skill of a portfolio manager, as it reflects the ability to generate returns that exceed what would be anticipated based on the level of risk taken. This unexpected performance can arise from various factors, including the manager's investment choices, market conditions, or asset selection. In contrast, other measures in the list signify different aspects of risk or performance. Beta measures a security's or portfolio's volatility in relation to the market, indicating market risk rather than unexpected performance. The Sharpe ratio assesses risk-adjusted returns by examining excess returns relative to volatility but does not capture unexpected performance specifically. Standard deviation quantifies the total risk of an investment's return fluctuations but does not communicate whether those returns are outperforming or underperforming compared to a benchmark. Thus, Alpha is the measure closely associated with understanding unexpected performance in investment returns.

The measure that reflects unexpected performance is Alpha. Alpha is a metric used to evaluate the excess return of an investment relative to a benchmark, typically after accounting for the risk taken. It essentially indicates how well an investment or portfolio has performed compared to a market index, with a positive Alpha suggesting outperformance and a negative Alpha indicating underperformance.

Alpha is particularly useful in assessing the skill of a portfolio manager, as it reflects the ability to generate returns that exceed what would be anticipated based on the level of risk taken. This unexpected performance can arise from various factors, including the manager's investment choices, market conditions, or asset selection.

In contrast, other measures in the list signify different aspects of risk or performance. Beta measures a security's or portfolio's volatility in relation to the market, indicating market risk rather than unexpected performance. The Sharpe ratio assesses risk-adjusted returns by examining excess returns relative to volatility but does not capture unexpected performance specifically. Standard deviation quantifies the total risk of an investment's return fluctuations but does not communicate whether those returns are outperforming or underperforming compared to a benchmark.

Thus, Alpha is the measure closely associated with understanding unexpected performance in investment returns.