CMA Final · Strategic Financial Management · Mutual Funds
Fund A has a return of 16%, standard deviation of 12% and beta of 1.2. Fund B has a return of 14%, standard deviation of 8% and beta of 0.8. The risk-free rate is 6%. Which statement is correct?
Fund B ranks higher on both measures. Its Sharpe ratio is 1.0 against 0.833 for Fund A, and its Treynor ratio is 10 against 8.33. Excess return per unit of total risk and per unit of beta are both better for B.
- AFund A has a higher Sharpe ratio and a higher Treynor ratio than Fund B
- BFund B has a higher Sharpe ratio and a higher Treynor ratio than Fund ACorrect
- CFund A has the higher Sharpe ratio, Fund B the higher Treynor ratio
- DFund B has the higher Sharpe ratio, Fund A the higher Treynor ratio
Explanation
Sharpe A = 10/12 = 0.833; Sharpe B = 8/8 = 1.0. Treynor A = 10/1.2 = 8.33; Treynor B = 8/0.8 = 10. B is higher on both measures, so the first, third and fourth statements fail.
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