Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Wild Cat Fund. According to the Sharpe measure, the performance of Buckeye Fund
A) is better than the performance of Wild Cat Fund.
B) is the same as the performance of Wild Cat Fund.
C) is poorer than the performance of Wild Cat Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

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 funds have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, assuming the risk-free rate is constant for both. The beta of the fund, which measures its volatility relative to the market, does not affect the Sharpe ratio calculation directly.

Suppose Two Portfolios Have the Same Average Return and the Same