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FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

Manager A has an excess return of 6% over the risk-free rate with beta of 0.6 and total volatility of 12%. Manager B has an excess return of 8% with beta of 1.0 and total volatility of 20%. Which ranking is correct?

Manager A ranks higher on both. A's Sharpe ratio is 0.50 versus 0.40 for B, and A's Treynor ratio is 10% versus 8%. Dividing excess return by either total risk or beta favors A despite B's larger raw excess return.

  1. AA ranks higher than B on both the Sharpe ratio and the Treynor ratioCorrect
  2. BB ranks higher than A on both measures
  3. CA ranks higher on Sharpe, B ranks higher on Treynor
  4. DB ranks higher on Sharpe, A ranks higher on Treynor

Explanation

Sharpe: A = 6/12 = 0.50, B = 8/20 = 0.40. Treynor: A = 6/0.6 = 10%, B = 8/1.0 = 8%. A is higher on both, so the ranking does not conflict. Assuming B's higher raw excess return wins ignores risk adjustment.

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