medium · FRM Part 1 Foundations of Risk Management
An investor is considering two portfolios. Portfolio X has a Sharpe ratio of 0.50 and a Treynor ratio of 0.08. Portfolio Y has a Sharpe ratio of 0.45 and a Treynor ratio of 0.10.
If the investor intends to add one of these to an already well-diversified existing portfolio, which should be chosen and why?
- Either one, since both ratios rank portfolios identically once markets reach equilibrium.
- Portfolio X should be chosen, simply because it has the higher Sharpe ratio.
- Portfolio Y, because the Treynor ratio is the relevant metric for a diversified investor
- Portfolio X, because it exhibits comparatively lower systematic market risk overall.
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