NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS portfolio returned 14%, the risk-free rate is 6% and the portfolio beta is 1.6. What is its Treynor ratio (as return per unit of beta, in percentage points)?
The Treynor ratio is 5.0. It equals the excess return over the risk-free rate, 8 percentage points, divided by the portfolio beta of 1.6, measuring reward per unit of systematic risk.
- A8.75
- B5.00Correct
- C12.5
- D8.00
Explanation
Treynor ratio = (14% - 6%) / 1.6 = 8 / 1.6 = 5.0. Without dividing by beta the result would be 8, which is wrong. 8.75 comes from 14/1.6, forgetting to subtract the risk-free rate. 12.5 comes from 20/1.6, an unrelated number.
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