During the annual review of Acme’s pension plan, several trustees questioned their investment consultant about various aspects of performance measurement and risk assessment.

a. Comment on the appropriateness of using each of the following benchmarks for performance evaluation:

• Market index.

• Benchmark normal portfolio.

• Median of the manager universe.

b. Distinguish among the following performance measures:

• The Sharpe ratio.

• The Treynor measure.

• Jensen’s alpha.

i. Describe how each of the three performance measures is calculated.

ii. State whether each measure assumes that the relevant risk is systematic, unsystematic, or total. Explain how each measure relates excess return and the relevant risk.