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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

Which statement about the Sharpe ratio and the Treynor ratio is correct?

The Sharpe ratio uses standard deviation, which is total risk, while the Treynor ratio uses beta, which is systematic risk. Both measure excess return over the risk-free rate per unit of the respective risk measure.

  1. ASharpe uses standard deviation as the risk measure, while Treynor uses betaCorrect
  2. BBoth use beta as the risk measure
  3. CSharpe uses beta, while Treynor uses standard deviation
  4. DBoth use standard deviation as the risk measure

Explanation

The Sharpe ratio divides excess return by total risk, measured by standard deviation. The Treynor ratio divides excess return by systematic risk, measured by beta. Hence Sharpe suits a whole undiversified portfolio, while Treynor suits a well-diversified part of a larger portfolio.

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