In: Finance
If you are planning to allocate your wealth among a number of funds, in order to rank portfolios and choose among them, you would use
a. Information Ratio
b. Treynor Ratio
c. Jensen's alpha
d. Sharp Ratio
The correct answer is Treynor ratio.
Explanation:
Treynor ratio is used evaluate the performance of a fund based on the systematic risk.
The ratio give the excess return earned by the portfolio over the risk free rate per unit of systematic risk.
When it comes to fully diversified mutual funds (unsystematic risk would be small due to diversification) the Treynor ratio would be the suitable method. This is because the Treynor method only measures the systematic risk.
The correct answer is Treynor ratio.