Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a higher beta than Arc Fund. According to the Sharpe measure, the performance of Roll Tide Fund
A) is better than the performance of Arc Fund.
B) is the same as the performance of Arc Fund.
C) is poorer than the performance of Arc Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Question

Quizplus · Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. Since both portfolios have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, regardless of their betas. Beta measures systematic risk, not the risk-adjusted return, which is what the Sharpe ratio is concerned with.

Suppose Two Portfolios Have the Same Average Return and the Same