2013CFA AM - Treynor or Sharpe

J

June06

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
- If the fund is well diversied, we should use Treynor Measure (systematic risk) to measure the risk-adjusted performance. (From choosing portfolio perspective)
- If the client has well diversied portfolio, we should use Treynor Measure (systematic risk) to pick other fund (From client perspective)
Second bullet point sounds weird to me, but it looks like 2013CFA AM Q11B is telling us…
What do you think?
 
I don’t have the question or answer in front of me, but when we are choosing from a group of diversifed portfolios we should pick the portfolio with the highest Treynor Ratio (systematic risk). When we are choosing from a group of undiversified portfolios we should be using the Sharpe Ratio (total risk).
 
Similar to pokhim’s post above, use the Treynor measure for choosing between a group of diversified portfolios where all unsystematic or company-specific risk has already been diversified away. The Treynor measure uses systematic risk in the denominator compared to the Sharpe ratio which uses total risk (unsystematic risk + systematic risk) in the denominator. The Sharpe ratio should be used if the group of portfolios being chosen amongst are undiversified portfolios.
Hope this helps!
OMGMileyCyrus
 
Thanks, fully understand from chooseing portfolio perspetive (First bullet point)
How about the second bullet?
 
I didn’t read the question, so I dunno what was the percerpectiv. But I hope the following helps:
- to add a new fund to a non diversified portfolio, compare Sharpe Ratio before and after the addition. Add if ratio gets higher.
- for diversified portfolio, use the same process using Treynor.
 
Audacious wrote:
I didn’t read the question, so I dunno what was the percerpectiv. But I hope the following helps:
- to add a new fund to a non diversified portfolio, compare Sharpe Ratio before and after the addition. Add if ratio gets higher.
Click to expand...
Do you mean this formula?
Sharpe ratio of new fund > Sharpe ratio of existing * correlation
 
jmsp wrote:
Audacious wrote:
I didn’t read the question, so I dunno what was the percerpectiv. But I hope the following helps:
- to add a new fund to a non diversified portfolio, compare Sharpe Ratio before and after the addition. Add if ratio gets higher.
Click to expand...
Do you mean this formula?
Sharpe ratio of new fund > Sharpe ratio of existing * correlation
Click to expand...
yes
 
But to use that formula, I don’t care about whether the existing fund is diversified or not…? As long as that formula is true, then there is benefit to adding?
 
jmsp wrote:
But to use that formula, I don’t care about whether the existing fund is diversified or not…? As long as that formula is true, then there is benefit to adding?
Click to expand...
so for a diversified portfolio, you’ll compare Sharpe before and after? Or Treynor before and Sharpe after (no of course)? Or Treynor before and after ?
 
Audacious wrote:
jmsp wrote:
But to use that formula, I don’t care about whether the existing fund is diversified or not…? As long as that formula is true, then there is benefit to adding?
Click to expand...
so for a diversified portfolio, you’ll compare Sharpe before and after? Or Treynor before and Sharpe after (no of course)? Or Treynor before and after ?
Click to expand...
Audacious - be very careful here. You need to remember that if the correlation between the two assets is low enough that even though the new asset’s share ratio is lower it could still be a wise addition to the portfolio.
 
JSobes wrote:
Audacious - be very careful here. You need to remember that if the correlation between the two assets is low enough that even though the new asset’s share ratio is lower it could still be a wise addition to the portfolio.
Click to expand...
No my friend.
if the ratio is lower, then the correlation is not “low enough”.
The end goal is to gain higher risk adjusted return.
Lower ratio means lower return, higher portfolio risk or both. Correlation is one factor. Other factors are the standard deviation and weight of the added fund/asset. You add an asset to:
- increase return (higher risk tolerance)
- reduce risk (lower risk tolerance)
- or, increase the risk adjusted return (best criteria)
 
Audacious wrote:
I didn’t read the question, so I dunno what was the percerpectiv. But I hope the following helps:
- to add a new fund to a non diversified portfolio, compare Sharpe Ratio before and after the addition. Add if ratio gets higher.
- for diversified portfolio, use the same process using Treynor.
Click to expand...
Client 1: He has a positive view of this sector and wants to invest all of his assets in an energy sector fund.
Client 2: She holds a well-diversified portfolio and wants to only slightly increase her exposure to the energy sector.

Dahl is asked to identify, based on risk-adjusted performance, which fund would be most appropriate for each of the two clients.

There is table shows three funds measured by Sharpe Ratio and Treynor.
 
Client one: has high industry specific exposure. He should use Sharpe
Client 2: has high systematic risk exposure (Beta).She should use Treynor.
I believe in the questions the values give the opposite indication, the portfolio that has higher Sharpe has lower Treynor. This is why you should use the appropriate method to decide which one is actually better.
 
If there is a table.
Fund A, very diversifed portfolio. Hgih sharpe ratio; Low Treynor.
Fund B, very concentrated portfolio. Low sharpe ratio; High Treyor.
How should client 1 and 2 choose?
 
June06 wrote:
If there is a table.
Fund A, very diversifed portfolio. Hgih sharpe ratio; Low Treynor.
Fund B, very concentrated portfolio. Low sharpe ratio; High Treyor.
How should client 1 and 2 choose?
Click to expand...
lower Treynor means higher denominator value (Beta). Which means higher exposure to systematic risk (diversified)
lower Sharpe means higher Standard Deviation. Which means higher exposure to total risk (concentrated)
 
You must log in or register to reply here.
Back
Top