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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Meridian Pharma Ltd compares two equity funds for its treasury surplus. Fund A returned 16% with a standard deviation of 12% and beta of 0.8. Fund B returned 18% with standard deviation of 15% and beta of 1.2. The risk-free rate is 7%. Which statement is correct?

Fund A is better on both measures. Its Sharpe ratio is 0.75 against 0.733 for Fund B, and its Treynor ratio is 11.25 against 9.17. Fund B's higher raw return does not compensate for its greater risk.

  1. AFund B has the higher Sharpe ratio and higher Treynor ratio
  2. BFund A has the higher Sharpe ratio and the higher Treynor ratioCorrect
  3. CFund A has the higher Sharpe ratio but Fund B has the higher Treynor ratio
  4. DFund B has the higher Sharpe ratio but Fund A has the higher Treynor ratio

Explanation

Sharpe A = 9/12 = 0.75; B = 11/15 = 0.733. Treynor A = 9/0.8 = 11.25; B = 11/1.2 = 9.17. Fund A is higher on both. Choosing B only on raw return ignores risk adjustment.

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