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CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision

A mutual fund scheme earned an average return of 14% in a year with a portfolio beta of 1.6. The risk-free rate was 6%. What is the Treynor ratio of the scheme, stated as percentage excess return per unit of beta?

The Treynor ratio is the excess return over the risk-free rate divided by beta. Here that is (14% − 6%) / 1.6 = 5.0. It measures reward per unit of systematic risk, so the total return must not be divided by beta.

  1. A5.0Correct
  2. B8.0
  3. C8.75
  4. D0.2

Explanation

Treynor ratio = (Rp − Rf) / beta = (14 − 6) / 1.6 = 5.0. Using 8.0 ignores the division by beta. 8.75 divides the total return, not the excess return, by beta. 0.2 inverts the ratio.

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