medium · Certified Financial Planner Investment Planning
An investment analyst is evaluating a mutual fund for the Alvarez household. The fund has a beta of 1.25 and an R^2 of 0.58 relative to its benchmark.
Which performance measure should be given the most weight in this evaluation?
- Treynor ratio, because the fund's beta is greater than 1.0, indicating high systematic risk.
- Sharpe ratio, because the low R^2 indicates that a significant portion of the risk is unsystematic.
- The Capital Market Line, because it allows for the comparison of any asset regardless of its correlation to the market.
- Jensen's alpha, as it isolates the manager's skill in generating excess returns regardless of diversification.
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