CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A diversified equity fund managed by an Indian AMC earned an average return of 14% in a year. Its portfolio beta is 1.25 and the risk-free rate is 6%. What is the Treynor ratio of the fund (per unit of beta)?
The Treynor ratio is 6.4%. It is the excess return over the risk-free rate, 14% minus 6% = 8%, divided by the portfolio beta of 1.25, so it measures reward per unit of systematic risk.
- A6.4%Correct
- B11.2%
- C8.0%
- D10.0%
Explanation
Treynor ratio = (Rp - Rf) / beta = (14 - 6) / 1.25 = 6.4%. The 11.2% option divides the total return by beta without deducting the risk-free rate. The 10.0% option multiplies the excess return by beta instead of dividing.
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