Answer: While the Treynor measure uses beta as the risk measure to assess the volatility of a portfolio relative to the market, the Sharpe measure takes into account the total risk exposure and hence uses the standard deviation.

## Explanation The correct answer is **A**. **Key Differences Between Treynor and Sharpe Measures:** ### Treynor Measure: - Uses **beta (β)** as the risk measure - Beta measures systematic risk (market risk) - Formula: (Portfolio Return - Risk-Free Rate) / Beta - Focuses on **market risk only** - Appropriate for well-diversified portfolios ### Sharpe Measure: - Uses **standard deviation** as the risk measure - Standard deviation measures total risk (systematic + unsystematic risk) - Formula: (Portfolio Return - Risk-Free Rate) / Standard Deviation - Considers **total risk exposure** - Appropriate for any portfolio, especially non-diversified ones **Why Option A is Correct:** - Accurately describes that Treynor uses beta (systematic risk) while Sharpe uses standard deviation (total risk) - This is indeed the major conceptual difference between the two measures **Why Other Options are Incorrect:** - **Option B**: Reverses the risk measures - Sharpe uses standard deviation, not beta - **Option C**: Both measures are straightforward to calculate; ease of calculation is not the major difference **Practical Application:** - Use **Treynor** when comparing well-diversified portfolios - Use **Sharpe** when comparing any portfolio, especially if diversification levels vary - Both measures help evaluate risk-adjusted performance, but they use different risk perspectives

Author: Tanishq Prabhu