Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[R_i] ________ the required return given portfolio P defined as in Formula (11.20) A) decrease, exceeds B) increase, exceeds C) increase, goes below D) decrease, exceeds.

Question

Quizplus · Accepted Answer

According to the Sharpe ratio formula, an increase in the amount invested in i will increase the numerator (portfolio excess return) and keep the denominator (portfolio risk) constant, thereby increasing the Sharpe ratio. If the expected return E[R_i] exceeds the required return given portfolio P, it implies that the portfolio is generating excess returns and is efficient. In this case, increasing the amount invested in i will further increase the excess returns and improve the portfolio's efficiency, leading to an increase in the Sharpe ratio. Thus, the correct answer is choice B.

Increasing the Amount Invested in I Will ________ the Sharpe