CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A mutual fund portfolio earned 14% during the year. The risk-free rate was 6% and the portfolio beta was 1.6. What is the Treynor ratio of the portfolio (per unit of beta, in percentage terms)?
The Treynor ratio is 5.00%. It equals the portfolio's excess return over the risk-free rate, 14% minus 6% which is 8%, divided by its beta of 1.6. It measures excess return per unit of systematic risk, not total risk.
- A5.00%Correct
- B8.75%
- C12.80%
- D8.00%
Explanation
Treynor ratio = (Rp - Rf) / beta = (14 - 6) / 1.6 = 5.00%. The 8.75% option divides the raw return by beta and ignores the risk-free rate. The 12.80% option multiplies by beta instead of dividing.
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