CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio manager at a Mumbai fund house reports an average annual return of 14% on a portfolio with a beta of 1.6. The risk-free rate is 6%. What is the Treynor ratio of the portfolio, expressed as excess return per unit of beta?
The Treynor ratio is 5.00%. It is the portfolio's excess return over the risk-free rate, 14% minus 6% = 8%, divided by its beta of 1.6. This measures reward per unit of systematic risk. Skipping the risk-free deduction gives a wrong 8.75%.
- A5.00%Correct
- B8.75%
- C12.80%
- D3.75%
Explanation
Treynor ratio = (Rp - Rf) / beta = (14 - 6) / 1.6 = 5.00%. Using 14/1.6 = 8.75% ignores the risk-free deduction. Multiplying 8 by 1.6 gives 12.80%, which is the wrong operation. Dividing 6 by 1.6 gives 3.75%, which uses the wrong numerator.
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