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FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

A portfolio has an excess return over the risk-free rate of 6%, a beta of 0.75, and total volatility of 12%. The market's excess return is 5% with volatility of 10%. What is the portfolio's Treynor ratio, and how does it compare with the market's Treynor ratio?

The portfolio's Treynor ratio is 8.0%, found by dividing its 6% excess return by its beta of 0.75. The market's beta is 1, so its ratio equals its 5% excess return. The portfolio therefore delivers more excess return per unit of systematic risk.

  1. A8.0%; higher than the market's 5.0%Correct
  2. B0.50; lower than the market's 0.50
  3. C8.0%; equal to the market's 8.0%
  4. D6.0%; higher than the market's 5.0%

Explanation

Treynor = excess return / beta = 6% / 0.75 = 8.0%. The market's beta is 1, so its Treynor ratio is 5.0%. The portfolio is higher. Dividing by volatility (0.50 vs 0.50) would give the Sharpe ratio, not Treynor.

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