medium · Frm Part 2 Risk & Investment Management
A hedge fund is analyzed using various performance metrics. The fund has a high Treynor ratio but a low Sharpe ratio.
What is the most likely structural characteristic of this fund?
- The fund is undiversified and carries significant idiosyncratic risk that is not captured by its beta.
- The fund is an 'all-weather' portfolio that maintains a constant Sharpe ratio across different market regimes.
- The fund's returns are highly smoothed, leading to an understated standard deviation.
- The fund has successfully eliminated its systematic risk through hedging, leaving only alpha-driven returns.
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