Portfolio C has a reward-to-volatility ratio of 1.8. For the same period, the average market return was 3.2% and the average riskfree return was 2%. The comparison is
A) the slope of the SML is 1.2 and Portfolio C had an inferior performance.
B) there is no standard to determine Portfolio C's performance.
C) the slope of the SML is 1.2 and Portfolio C had a superior performance.
D) the slope of the SML is 1.6 and Portfolio C had an inferior performance.

Question

Quizplus · Accepted Answer

The slope of the Security Market Line (SML) is calculated as (market return - risk-free rate), which is (3.2% - 2%) = 1.2. Portfolio C's reward-to-volatility ratio of 1.8 is higher than the SML slope of 1.2, indicating superior performance.

Portfolio C Has a Reward-To-Volatility Ratio of 1