dvilayphet

Correct nashwbe - C is it! With that happy note, let’s get out of work for some happy hour! TGIF.
When is all this going to get over, again, please remind me?

kickthatcfa

For well-studied people such as yourself, this will be over in less than a month. For people like me, hopefully in 1 year + 1 month. : P

redskins44

You don’t know how much under the water I am, mate… Just trying to drink it through! It’s slow poison.
I am taking this half a day off from study and get back to it probably Sat with GIPS (yes, I still have that pending)

Swanand

Haha nice man, I feel slightly better since you seem to know a lot. If it makes you feel better, I’m going to start “managed futures” for the first time after work today. I wish I could say I was starting on GIPS. : P

busterbluth

Based on the explanation provided, the Sharpe of the stock being added is not equal to the Treynor of the stock since the stock exhibits unsystematic risk. The diversified portfolio, on the other hand, should not be affected by which ratio is used, for the reason you gave. But when the stock is added, unsystematic risk will be diversified away, so why use the Sharpe ratio when looking at the stock’s contribution to the portfolio? I think that’s why Treynor is best here.

thecfawannabe

Analog of the first question: 1 is a positive number, but 1 is not a non-negative number.

thommo77

Then why use the sharpe ratio ever when evaluating whether a stock should be added?

firat

Check out the 2nd question provided by L3Crucifier in this thread - that’s when you would use Sharpe. Since the portfolio that the stock will be added to is not diversified, then the new stock’s unsystematic risk is actually going to significantly contribute to total risk. As a result, you should look at the relative Sharpes to see if the reward for total risk is worth it.
If the portfolio is diversified, the reward for total risk is irrelevant. All that matters is reward for systematic risk, since the stock’s unsystematic risk will have an insignificant effect on the diversified portfolio.

DSquaredSlim

For a well diversified portfolio. the two measures(sharpe ratio and treynor ratio) should give the same conclusion. Adding the stock will have impact on the beta and the unssytematic risk, although it may be insignificant.

anshultongia

I see what they are getting at, but I don’t think it’s as simple as they are trying to make it. I would like to know the answer to CPK’s question of: are they saying if Treynor (Port)
Normally (if using the Sharpe) you would need to account for correlation between the portfolio and the new asset, but correlation is a function of std dev (total risk) so you couldn’t use correaltion of assets and portfolios when using the Treynor. Instead you would need to compare the relation between betas of the two assets, which would be a totally different measure.
Most portfolios are diversified (at least that’s the goal of many portfolios) so why would CFAI focus on using the Sharpe when adding new securities to portfolios?