Explanation:
The major difference between the Treynor and Sharpe measures lies in the type of risk they use in their denominators. The Treynor measure evaluates the performance of a portfolio by dividing the excess return by the portfolio's beta, which is a measure of systematic risk. On the other hand, the Sharpe ratio divides the excess return by the standard deviation of the portfolio, which captures total risk (both systematic and unsystematic). Thus, Option A is correct. Option B incorrectly swaps the risk measures. Option C is subjective and inaccurate. Option D is incorrect because the Treynor measure is better suited for well-diversified portfolios (since it ignores unsystematic risk), while the Sharpe measure evaluates total risk, making it suitable for any portfolio.
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Q.201 Which of the following is a major difference between Treynor and Sharpe measures?
A
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.
B
While the Sharpe measure uses beta as the risk measure to assess the volatility of a portfolio relative to the market, the Treynor measure takes into account the total risk exposure, hence uses the standard deviation.
C
The Treynor measure is more straightforward and easier to calculate as compared to 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.
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