“The complete portfolio has the same reward-to-variability ratio of the risky asset”. True OR False?

“The complete portfolio has the same reward-to-variability ratio of the risky asset”.

True OR False?

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Expert Solution

Answer:- False

Explanation:- The expected return of the complete portfolio will be impacted if the asset allocation is changed in the complete portfolio. Since the expected return of the portfolio is the first item in the numerator of the reward-to-variability ratio (or Sharpe ratio), the ratio will be changed. So, the complete portfolio does not necessarily has the same reward-to-variability ratio of the risky asset.

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