Answer: The Sharpe measure

## Explanation The **Sharpe ratio** is more relevant for Mr. Cook's situation because: ### Key Differences Between Sharpe and Treynor Ratios: - **Sharpe Ratio**: Measures excess return per unit of **total risk** (systematic + unsystematic risk) - **Treynor Ratio**: Measures excess return per unit of **systematic risk** only (beta) ### Why Sharpe is More Appropriate: 1. **Undiversified Portfolio**: Mr. Cook's securities portfolio ($700,000) is explicitly stated as "undiversified," meaning it contains significant **unsystematic risk** that the Treynor ratio ignores. 2. **Total Risk Assessment**: As a retired surgeon, Mr. Cook would be concerned with the safety of both income and principal, regardless of whether the risk comes from systematic or unsystematic sources. 3. **Asset Composition**: His portfolio represents the largest portion of his assets, and its undiversified nature means total risk (captured by Sharpe) is more relevant than just systematic risk (captured by Treynor). ### Why Other Options Are Incorrect: - **A (Treynor)**: Only considers systematic risk, which is insufficient for an undiversified portfolio - **B (Mixed approach)**: Inappropriate because the portfolio's undiversified nature means Treynor would give misleading results - **D (Neither)**: Incorrect because Sharpe ratio provides valuable risk-adjusted performance assessment The Sharpe measure provides a more comprehensive view of risk-adjusted returns when dealing with portfolios that contain significant unsystematic risk.

Author: Tanishq Prabhu