Portfolio C has an ex post alpha of +1.7 and the slope of the SML is 2.4. This means the reward-to-volatility ratio for Portfolio C will be
A) between 1.7 and 2.4.
B) also 1.7.
C) less than 2.4.
D) greater than 2.4.

Question

Quizplus · Accepted Answer

The reward-to-volatility ratio, often represented by the Sharpe ratio, measures the excess return per unit of risk. The ex post alpha of +1.7 indicates that Portfolio C has outperformed its benchmark by 1.7 units, adjusting for risk. The slope of the Security Market Line (SML), which is 2.4, represents the market's reward-to-volatility ratio. Since Portfolio C has a positive alpha, it means it has provided a higher return for its level of risk than the market average, implying its reward-to-volatility ratio is greater than that of the market, hence greater than 2.4.

Portfolio C Has an Ex Post Alpha of +1