The solution to in Q-bk stated : Treynor Measure is used to evaluate portfolios that will be an edition to an overall larger portfolio. Sharpe Ratio is used to evaluate portfolios that will comprise the majority of the investor’s overall asset base. Anyone can explain ?
Treynor considers Beta as a denominator (systematic risk) and Sharpe takes std dev (total risk)
Correction to previous message : Treynor Measure is used to evaluate portfolios that will be an “addition” to an overall larger portfolio. pupdawg82 Wrote: ------------------------------------------------------- > Treynor considers Beta as a denominator > (systematic risk) and Sharpe takes std dev (total > risk) I know that Treynor considers Beta as a denominator (systematic risk) and Sharpe takes std dev (total risk), but can you explain more tangibly/clearly why it is so ?
Treynor: If you have a larger portfolio which here it is assumed invested in various asset classes, Debt/Equity, and various stocks from various sectors, then the unsystematic (or specific risk) is diversified away. Which means you are not impacted severely adversely if any asset class is highly volatile, or any sector. Here what I meant is that since you hold large and (assumed diversified) if one portion is doing badly the other will do good. What risk is left then -> only systematic (or market risk). How do you measure systematic/or market risk - with BETA. Because Beta is the only priced risk if it is a well diversified portfolio. Sharpe Ratio: If the PF is not large or the investor has not invested in any other asset with any other PF manager and comes to you with lot of fund to be invested. Here you have to consider both Systematic and unsystematic. Because it not in “ADDITION”, this is full/all PF. So you have to worry about total risk, which is measured by Standard Deviation. Sharpe uses SD. In the “addition” case, you can assume other portions of PF will act a fulcrum, balancing act. But here this is the fund to be invested (no other balancing portions) you have to be concerned about total risk. Hope this is clear.
AMC Wrote: ------------------------------------------------------- > The solution to in Q-bk stated : > > Treynor Measure is used to evaluate portfolios > that will be an edition to an overall larger > portfolio. > Sharpe Ratio is used to evaluate portfolios that > will comprise the majority of the investor’s > overall asset base. > > Anyone can explain ? Those statements are somewhat true. When you add an investment to a portfolio, you want to make sure it has alpha (individual assets are not overpriced) -> Treynor can be used for stocks. Then when you have a portfolio of assets, try to increase risk-adjusted return (Sharpe).