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Portfolio Manager A in the past year had a return of 15% and the standard deviation...

Portfolio Manager A in the past year had a return of 15% and the standard deviation of the portfolio return was 25%. Portfolio Manager B in the past year had a return of 20% and the standard deviation of the portfolio return was 30%. The rate on treasury bills was 5%. Who is the better manager? Why?

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Answer #1

Sharpe Ratio = (rp - rf)/Standev

Manager with higher sharpe ratio is better manager as he is generating higher risk adjusted return,

Sharpe Ratio for Portfolio Manager A = (0.15 - 0.05)/0.25

Sharpe Ratio for Portfolio Manager A = 0.40

Sharpe Ratio for Portfolio Manager B = (0.20 - 0.05)/0.30

Sharpe Ratio for Portfolio Manager B = 0.50

As Sharpe Ratio for Portfolio Manager B is higher so Portfolio Manager B is better.

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