CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
An investor holds a single fund that is the only risky holding in her total wealth, and she wants to compare it with other possible funds. Which performance measure is most appropriate?
The Sharpe ratio is most appropriate because the fund is the investor's whole risky holding, so total risk measured by standard deviation is relevant. Treynor and Jensen's alpha consider only systematic risk and fit portfolios that are components of a diversified overall portfolio.
- ASharpe ratioCorrect
- BTreynor ratio
- CJensen's alpha
Explanation
When a portfolio represents the investor's entire risky holding, total risk matters, so the Sharpe ratio, which uses standard deviation, is appropriate. Treynor and Jensen's alpha use only systematic risk, which suits a well-diversified portfolio that is one part of a larger one.
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