NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
A portfolio earned 14% in a year when the risk-free rate was 6%. Its standard deviation was 16% and beta was 1.25. What is its Treynor ratio (as return per unit of beta, in percentage points)?
The Treynor ratio is 6.40. It equals excess return over the risk-free rate, 14% minus 6% = 8%, divided by beta of 1.25. Treynor uses systematic risk (beta) in the denominator, not standard deviation, and the risk-free rate must be deducted first.
- A0.50
- B5.00
- C6.40Correct
- D11.20
Explanation
Treynor = (14 - 6) / 1.25 = 8 / 1.25 = 6.40. The option 0.50 is the Sharpe ratio (8/16), which wrongly uses standard deviation. The option 5.00 results from dividing 8 by 1.6, which is not a valid input. The option 11.20 is 14 / 1.25, which forgets to subtract the risk-free rate.
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