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Answer: The Treynor measure uses beta as the risk measure, while the Sharpe measure uses standard deviation as the risk measure.
## Explanation The correct answer is **A**. ### Key Differences Between Treynor and Sharpe Measures: **Treynor Measure:** - Uses **beta** as the risk measure - Beta measures the volatility of a portfolio relative to the market - Only considers **systematic risk** (market risk that affects all securities) - Systematic risk cannot be eliminated through diversification **Sharpe Measure:** - Uses **standard deviation** as the risk measure - Standard deviation measures the **total risk** of the portfolio - Includes both **systematic and unsystematic risk** - Unsystematic risk is unique to individual securities and can be eliminated through diversification ### Why Other Options Are Incorrect: **Option B:** Incorrect - The Sharpe measure does NOT use beta; it uses standard deviation. The Treynor measure uses beta, not standard deviation. **Option C:** Incorrect - The complexity of calculation is not a primary distinction between the two measures. Both are relatively straightforward to calculate when the required data (returns, beta, or standard deviation) are available. **Option D:** Incorrect - Both measures can be used for any type of portfolio, regardless of diversification level. The Sharpe measure is particularly useful for evaluating portfolios that are not well-diversified since it considers total risk. ### Practical Implications: - **Treynor Ratio** is better for well-diversified portfolios where unsystematic risk has been minimized - **Sharpe Ratio** is more appropriate for portfolios that may not be fully diversified, as it accounts for both systematic and unsystematic risk - Both ratios help investors compare risk-adjusted returns across different portfolios or investment strategies
Author: Tanishq Prabhu
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The Treynor measure and the Sharpe measure are both used to evaluate the performance of a portfolio by comparing the risk-adjusted returns. However, they differ in the way they measure risk. Which of the following statements accurately describes the difference between the Treynor measure and the Sharpe measure?
A
The Treynor measure uses beta as the risk measure, while the Sharpe measure uses standard deviation as the risk measure.
B
The Sharpe measure uses beta as the risk measure to assess the volatility of a portfolio relative to the market, while the Treynor measure uses standard deviation to measure total risk.
C
The Treynor measure is more complex to calculate than the Sharpe measure.
D
The Sharpe measure can only be used for well-diversified portfolios, while the Treynor measure can be used for any type of portfolio.