CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A mutual fund earned an average return of 14% in a year. The risk-free rate was 6% and the fund's beta was 1.6. What is the fund's Treynor ratio, in percentage points of excess return per unit of beta?
The Treynor ratio is 5.00. It is the excess return of 8% (14% less 6%) divided by the beta of 1.6, which measures reward per unit of systematic risk. Using total return without deducting the risk-free rate gives a wrong figure.
- A5.00Correct
- B8.75
- C12.80
- D3.75
Explanation
Treynor ratio = (Rp - Rf)/beta = (14 - 6)/1.6 = 5.00. Dividing the total return by beta (14/1.6 = 8.75) ignores the risk-free deduction, so it is wrong. The ratio uses systematic risk only.
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