An investment advisor is evaluating two portfolios. Portfolio A has a Sharpe Ratio of 0.85, and Portfolio B has a Sharpe Ratio of 1.10. Both portfolios have the same standard deviation and their returns are compared to the same risk-free rate. Which statement is true based on this information?

Question: An investment advisor is evaluating two portfolios. Portfolio A has a Sharpe Ratio of 0.85, and Portfolio B has a Sharpe Ratio of 1.10. Both portfolios have the same standard deviation and their returns are compared to the same risk-free rate. Which statement is true based on this information?

Answer options: ✅ Portfolio B generated higher excess return per unit of total risk than Portfolio A.

• Portfolio A generated higher excess return per unit of systematic risk than Portfolio B.
• Portfolio B's outperformance is solely due to its lower systematic risk.
• Portfolio A's higher Sharpe Ratio indicates better absolute performance.

Correct answer: Portfolio B generated higher excess return per unit of total risk than Portfolio A.

Explanation: The Sharpe Ratio measures the excess return per unit of total risk (standard deviation). A higher Sharpe Ratio indicates better risk-adjusted performance.