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Answer: Treynor ratio
## Explanation When concerned only with **systematic risk**, the **Treynor ratio** is the most appropriate measure. **Comparison of performance measures:** - **Treynor Ratio** = (Portfolio Return - Risk-Free Rate) / Beta - Uses beta (systematic risk) as the denominator - Best for comparing portfolios with different systematic risk levels - Appropriate when investors hold well-diversified portfolios - **Sharpe Ratio** = (Portfolio Return - Risk-Free Rate) / Standard Deviation - Uses total risk (standard deviation) as the denominator - Includes both systematic and unsystematic risk - **Jensen's Alpha** = Portfolio Return - [Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)] - Measures abnormal performance relative to CAPM - Not specifically designed for ranking based on systematic risk - **Sortino Ratio** = (Portfolio Return - Minimum Acceptable Return) / Downside Deviation - Focuses on downside risk only - Not specifically related to systematic risk Since the question specifies being concerned only with systematic risk and ranking funds with different betas, the Treynor ratio is the most appropriate choice.
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Assume that you are only concerned with systematic risk. Which of the following would be the best measure to use to rank order funds with different betas based on their risk-return relationship with the market portfolio?
A
Treynor ratio
B
Sharpe ratio
C
Jensen’s alpha
D
Sortino ratio
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