Homework Answers
Answer:
B is better as it has higher Sharpe ratio
As the portfolio is not well diversified, we have to consider standard deviation and not beta
Sharpe ratio=(return-risk free rate)/standard deviation
A=(12%-3%)/15%=0.6
B=(18%-3%)/20%=0.75
Treynor ratio=(return-risk free rate)/beta
A=(12%-3%)/0.5=0.18
B=(18%-3%)/1.1=0.13
Had the portfolio been well diversified, we would have considered beta and concluded A is better as it has higher Treynor ratio
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