USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6 percent with a standard deviation of 13 percent and a beta of 1.3. The market risk premium for this period of time was 6 percent, and the risk-free rate of return was 5 percent.
-Refer to Exhibit 7.6. How does Jonathan Crowley's portfolio compare to the market portfolio?
A) Crowley's portfolio is less risky than the market portfolio.
B) Crowley's portfolio significantly outperformed the market portfolio.
C) On a risk-adjusted basis Crowley's portfolio performed similar to the market portfolio.
D) On a risk-adjusted basis Crowley's portfolio significantly underperformed the market.
E) On a risk-adjusted basis Crowley's portfolio significantly outperformed the market.

Question

Quizplus · Accepted Answer

The beta of Crowley's portfolio is 1.3, which means it is more risky than the market portfolio (which has a beta of 1). However, on a risk-adjusted basis (using the Sharpe Ratio), Crowley's portfolio performed similarly to the market portfolio since his portfolio had a higher return (12.6% vs. 11%) but also a higher standard deviation (13% vs. 10%).