Scweser bk 5, self test, p 170-172

HI, I have a question regardind the question above. Ill repost a summary to make it easier for everyone… 2 Stmts are made Willis states that “results demonstrate that the Jaguar portfolio is LESS diversified than the Theta portfolio” Dunne states that “theta would be a better addition to the National Portfolio than the Jaguar fund would be” Question also states that the National Port is a “well diversified, consists of US and Intl Stocks and bonds, hedge and real estate, and has a small cash position to meet quarterly expenses” Basically Willis and Dunne are talking about which port (Theta or Jaguar) to add to the National Port. Jaguars Sharpe Ratio --> 16.5 - 4.5 / 38.1 = 0.3149 Theta Sharpe Ratio --> 15.9 - 4.5 / 35.6 = 0.32022 Jaguar Trynor --> 16.5-4.5 / .8 = 15 Theta Treynor --> 15.9 - 4.5 / 1.25 = 9.12 Question then asks us if stmts made by Dunne and Willis are correct… So, willis suggests that the Jaguar port is less diversified than Theta. Answer states he is correct. How do we make sense of this?? Jag’s sharpe is lower than theta, so that suggests a lower risk adjusted return, but his Treynor is much higher (15 vs 9.12). what does this mean?? Wouldnt a higher Treynor suggest a higher return per unit of systematic risk? I dont get it… Dunne is incorrect. Jaguar would be a better addition to the National Port. Again I dont get it. National is well diversifed, and the answer states that Jag is poorly diversifed, therefore is a better fit for national. Anyhelp would be appreciated. Thanks!

I’m stuck here with this same question now…Does anyone know the answer for the question above?

Correct me if i wrong…

I think it is to do with the risk measure being used.

Total risk is higher for jaguar than theta.

Jaguar’s Treynor ratio indicates the level of return relative to SYSTEMATIC risk is high. But the Sharpe Ratio being lower indicates that Jaguar’s TOTAL risk is high, indicating that it indeed has a large amount of nonsystematic risk, which means it is less well diversified.

I think the answer to why Dunne is incorrect is because since National is well-diversified, you want to select the portfolio that has a higher level of return per unit of systematic risk, which would be Jaguar.