Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. Since both portfolios have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, regardless of their betas. Beta measures systematic risk, not the risk-adjusted return, which is what the Sharpe ratio evaluates.

Suppose Two Portfolios Have the Same Average Return and the Same