The measurement of portfolio performance is an important practical application
of asset pricing theory. Two popular measures of performance are the
‘Jensen coefficient’ and Treynor and Black’s ‘appraisal ratio’. U’sing the
Capital Asset Pricing Model (CAPM), Jensen (1968) suggests that a positive
deviation of a portfolio’s average return from that predicted by the security
market line (the Jensen coefficient) indicates superior performance. The appraisal
ratio is a refinement of Jensen’s measure and is equal to the ratio of the Jensen coefficient to the amount of non-market risk undertaken by the manage