NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
A portfolio managed for Mr. Iyer earned an average return of 14% with a standard deviation of 20%. The risk-free rate is 6% and the portfolio beta is 1.25. What is its Treynor ratio?
The Treynor ratio is excess return divided by beta. Excess return is 14% minus 6%, which is 8%. Dividing 8% by a beta of 1.25 gives 6.4%, or 0.064. The value 0.40 would be the Sharpe ratio, which uses standard deviation rather than beta.
- A0.064Correct
- B0.40
- C0.112
- D0.08
Explanation
Treynor ratio = (Rp - Rf) / beta = (14% - 6%) / 1.25 = 8% / 1.25 = 6.4%, i.e. 0.064. Check: 0.064 x 1.25 = 0.08. The option 0.40 is the Sharpe ratio (8/20), which uses standard deviation instead of beta. The option 0.112 multiplies 8% by beta instead of dividing. The option 0.08 ignores beta.
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