Which answer would you pick to this question. This is one that I had run across and can’t figure out why they gave me the answer that they did.
Beta R^2 Treynor Sharpe
Fund A 2.0 82 4.23 8.3
Fund B 1.9 80 3.0 10.91
Fund C 1.5 90 6.49 3.92
Which fund should you select and why?
B because of highest sharpe ratio?
I think it is a tricky one and my guess would be C. Treynor only uses Beta and R2 is high for C.
The answer also said C due to the high R^2 as well. I just had some trouble getting my head around it.
Did question say select on the basis of Treynor ratio? Please post full question if possible
I thought we were done with treynorB in L2…I don’t recall seeing it on the L3 curriculum?
Need more info. Sharpe ratio is wrt total risk while Treynor is wrt systemic risk. The nature of the funds proposed may give insight into which ratio is more appropriate. Are these funds part of a well-diversified portlofio? or they are judged on a stand-alone basis…
Treynor is in CFA 3 curriculum under performance evaluation.
Question has to be intererpreted in the context of a portfolio (because that’s what the readings say).
If well-diversified then it only has systematic risk so Treynor is more appropriate
If not, it has unsystematic risk to account, so Sharpe is more appropriate
Also, the readings also say that using Sharpe in selecting an asset for inclusion in a portfolio requires its correlation with that existing portfolio. When the question stem is too incomplete (i.e. asking students to make assumptions), then the question needs to be re-written.
The good thing about this kind of question is you get challenged to correct a faulty question and in the process you get to thoroughly review the concepts involved.
It’s not you, it’s the problem. So don’t sweat it and move on. 
comparing A to B , A takes larger total-risk for very nearly same systematic risk ( sigma_A=1.02 while sigma_B=0.522 ). So B is better than A.
comparing B to C , B is obviously much lower on total risk , but is higher on systematic risk ( 1.9 versus 1.5 ) with lower R^2 .
Don’t know how to choose between B and C , other than higher return ( Rp-Rf) for C