If the AM Growth Fund is undiversified, the Sharpe ratio would be more appropriate. The Sharpe ratio measures excess return per unit of total risk, while Treynor measures excess return per unit of systematic risk. For a well-diversified portfolio, the rankings between the Sharpe and Treynor measures will be insignificant as total risk and systematic risk will be approximately the same. However, if a portfolio is not well diversified, the Treynor measure may overstate the portfolio's ranking because only systematic risk is considered. Sharpe will consider unsystematic risk, which will give the undiversified portfolio a more appropriate ranking. |
