Assume Portfolio A and Portfolio B are well-diversified; however, Portfolio A has a higher standard deviation than Portfolio B. Based on this information, the Sharpe ratio will give Portfolio A:
A) the higher rank, and the Treynor ratio will give Portfolio B the higher rank.
B) the lower rank, and the Treynor ratio will give Portfolio B the lower rank.
C) the same rank as the rank assigned by the Treynor ratio.
D) a rank that varies directly based on the overall market risk.

Question

Quizplus · Accepted Answer

The Sharpe ratio and Treynor ratio both measure risk-adjusted returns, but the Sharpe ratio uses total risk (standard deviation) while the Treynor ratio uses systematic risk (beta). Since both portfolios are well-diversified, the rankings by both ratios will be consistent.

Assume Portfolio a and Portfolio B Are Well-Diversified; However, Portfolio