One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that, when optimized, its squared Sharpe measure increases by the square of the active portfolio's
A) Sharpe ratio.
B) information ratio.
C) alpha.
D) Treynor measure.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The squared Sharpe measure of an optimized risky portfolio that combines an active portfolio of mispriced securities with a market portfolio increases by the square of the active portfolio's information ratio. This is because the information ratio measures the active return of the portfolio relative to the return of a benchmark portfolio, adjusted for the risk of active management, making it a key metric in evaluating the added value of active management strategies.

One Property of a Risky Portfolio That Combines an Active