You are a financial adviser at Allan Gray, an investment management company in South Africa. Your client would like to invest in an offshore investment fund, and has limited his investment pool to two offshore funds; Allan Gray Frontier Markets Equity Fund and Allan Gray Australia Equity Fund. You have obtained the following information on the funds in order to provide guidance to your client.

Average rate of returnStandard deviation of returnsBetaAllan Gray Frontier Markets Equity Fund10%18%0.60Allan Gray Australia Equity Fund12%13%1.10T-bills Proxy6%--Market Proxy Fund11%12%1.00

Required

(i) Advise your client on which fund should be selected based on the Sharpe and Treynor measures of portfolio performance. (5 marks)

(ii) Briefly explain the reason for the conflicting results in (i) above when using the Sharpe ratio versus the Treynor ratio. (3 marks)

(iii) Your client has decided that the selected fund would be a stand-alone portfolio and will not be combined with any other securities. Based on this information, provide a recommendation of which fund should be chosen. (7 marks)