NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
A portfolio manager's portfolio earned 14% in a year with a standard deviation of 20% and a beta of 1.2. The risk-free rate was 6%. What is the Treynor ratio of the portfolio, expressed in percentage points of excess return per unit of beta?
The Treynor ratio is 6.67. It is computed as the excess return over the risk-free rate, 14% minus 6% equals 8%, divided by the portfolio beta of 1.2. The result measures excess return per unit of systematic risk.
- A6.67Correct
- B0.40
- C8.00
- D7.00
Explanation
Treynor = (14% - 6%) / 1.2 = 8 / 1.2 = 6.67. Dividing by the standard deviation of 20% gives 0.40, which is the Sharpe ratio, not Treynor. Using 8 without dividing by beta gives 8.00, which is simply excess return.
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