CMA Final · Strategic Financial Management · Mutual Funds
A fund's portfolio has an annual return of 14%, standard deviation of 10% and beta of 0.8. The risk-free rate is 6% and the market return is 12%. What are the Sharpe ratio and the Treynor ratio (per unit of beta, in percentage points)?
Sharpe is 0.80 and Treynor is 10. Excess return over the risk-free rate is 8 percentage points. Dividing by the standard deviation of 10 gives 0.80, and dividing by beta of 0.8 gives 10.
- ASharpe 0.80; Treynor 10.00Correct
- BSharpe 0.80; Treynor 8.00
- CSharpe 1.40; Treynor 10.00
- DSharpe 0.60; Treynor 7.50
Explanation
Excess return = 14 − 6 = 8. Sharpe = 8/10 = 0.80. Treynor = 8/0.8 = 10. Using 8 as Treynor mistakes it for excess return without dividing by beta.
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