CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
Portfolio C has a Sharpe ratio of 0.50 and Portfolio D has a Sharpe ratio of 0.40. Both are measured against the same risk-free rate. Which statement is most accurate?
Portfolio C earns more excess return per unit of total risk than Portfolio D. The Sharpe ratio divides excess return by standard deviation, so a higher value signals better risk-adjusted compensation, though it implies nothing about absolute returns or systematic risk.
- APortfolio C has a higher return than Portfolio D.
- BPortfolio C earns more excess return per unit of total risk than Portfolio D.Correct
- CPortfolio C has lower systematic risk than Portfolio D.
Explanation
The Sharpe ratio is excess return per unit of standard deviation, so a higher ratio means more compensation per unit of total risk. It says nothing about absolute return levels or about beta.
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