Chapter 18, Problem 6CP

a.

Summary Introduction

To calculate:

The Treynor ratio and the Sharpe measure for portfolio X, which is comprised of U.S. common stocks, and S&P $500$ both from the given information about the rate, standard deviation and beta.

Introduction:

Treynor Ratio is a risk-adjusted measurement of return. It helps in computing the reward-to-volatility ratio. This ratio provides excess return over expected in regard to systematic risk i.e. beta.

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. This ratio gives an understanding of the incremental return which an investor will expect to earn on every $1\%$ increase in the value of standard deviation.

b.

Summary Introduction

To determine:

The reason of difference in the results obtained by using Treynor ratio and Sharpe ratio for evaluation of performance of portfolio X and S&P $500$ .

Introduction:

Treynor Ratio is a risk-adjusted measurement of return. It helps in computing the reward-to-volatility ratio. This ratio provides excess return over expected in regard to systematic risk i.e. beta.

Sharpe ratio is a ratio which helps in computing the reward-to-volatility ratio. This ratio gives an understanding of the incremental return which an investor will expect to earn on every $1\%$ increase in the value of standard deviation.