Which Ratio to Use for Best Evaluation of Portfolio's Systematic Risk of Investment?

A

The correct answer in this case would be option D: Sharpe reward-to-variability ratio.

The Sharpe ratio is a widely used measure in finance to assess the risk-adjusted performance of an investment or a portfolio. It was developed by William F. Sharpe, a Nobel laureate in economics.

The ratio is calculated by subtracting the risk-free rate of return from the portfolio's rate of return and dividing the result by the standard deviation of the portfolio's returns. Mathematically, it can be represented as follows:

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio Returns

The Sharpe ratio takes into account both the return and the risk of an investment. By using the standard deviation of the portfolio's returns in the denominator, it captures the investment's volatility or variability. A higher standard deviation implies higher risk.

In the given question, the portfolio's numerous other assets systematic risk of investment is being considered. Systematic risk refers to the risk that affects the entire market or a specific sector, as opposed to unsystematic or idiosyncratic risk that is specific to individual assets.

The Sharpe ratio is particularly useful in situations where the systematic risk of an investment needs to be evaluated. By incorporating the standard deviation of the portfolio's returns, it takes into account the volatility caused by systematic risk factors. Therefore, it provides a measure of the investment's risk-adjusted performance that is suitable in this scenario.

Option A, the Treynor reward-to-volatility ratio, is similar to the Sharpe ratio but uses beta (a measure of systematic risk) instead of standard deviation in the denominator. Since the question specifically mentions the portfolio's numerous other assets systematic risk, the Sharpe ratio, which considers standard deviation, is more appropriate.

Option B, Jensen's differential return ratio, is a measure used to assess the excess return of a portfolio compared to its expected return based on a capital asset pricing model (CAPM). It does not specifically capture the systematic risk of the investment, so it is not the best ratio in this context.

Option C, Jennet's return on liquidity ratio, is not a commonly known ratio in finance. It does not pertain to the assessment of systematic risk or risk-adjusted performance and is therefore not relevant in this scenario.

In summary, when considering the portfolio's numerous other assets systematic risk of investment, the most appropriate ratio to use is the Sharpe reward-to-variability ratio (option D).