What is a characteristic of Investment #1 based on the Treynor Ratio?

The Treynor Ratio is a measure of risk-adjusted return, calculated as the excess return of an investment over the risk-free rate, divided by the investment's beta. A higher Treynor Ratio indicates that an investment is providing a better return for the level of systematic risk taken.

Choosing option A highlights a key aspect of the Treynor Ratio: a higher preference for risk generally indicates that investors are willing to accept more volatility to potentially achieve higher returns. When the Treynor Ratio is high, it suggests that the investment is yielding attractive returns relative to the risk taken, reflecting a preference for accepting that risk.

The other options do not accurately capture the implications of the Treynor Ratio in the same context. For example, a lower expected return would be contrary to what is indicated by a high Treynor Ratio, which typically associates with higher returns relative to risk. Similarly, higher volatility can be associated with higher risk; however, the Treynor Ratio focuses specifically on systematic risk rather than total volatility. Therefore, while higher volatility might be a byproduct of higher risk preference, it does not directly characterize what is captured by the Treynor Ratio in this context.

Thus, the correct answer underscores the relationship between return and