Skip to content

CA Final · Advanced Financial Management · Mutual Funds

Equity scheme Alpha reported a return of 14%, with a beta of 0.8 and a standard deviation of 15%. The risk-free rate is 6%. Using the Treynor measure, what is the reward per unit of systematic risk for Alpha, and how does it compare with the market, whose return is 12%, with a beta of 1?

Alpha's Treynor ratio is 10, from excess return of 8% divided by beta of 0.8. The market's Treynor ratio is 6, being 6% divided by beta 1. Alpha therefore delivers more excess return per unit of systematic risk and outperforms the market.

  1. ATreynor 10; it outperforms the market whose Treynor is 6Correct
  2. BTreynor 10; it underperforms the market whose Treynor is 12
  3. CTreynor 0.53; it outperforms the market whose Treynor is 0.40
  4. DTreynor 7.5; it outperforms the market whose Treynor is 6

Explanation

Alpha Treynor = (14 - 6)/0.8 = 10. Market Treynor = (12 - 6)/1 = 6. Since 10 > 6, Alpha outperforms on a systematic-risk-adjusted basis. Dividing 8 by 15 gives 0.53, which wrongly uses standard deviation (a Sharpe computation).

Did you get it right without looking?

One question tells you little. A timed set on Mutual Funds shows your real accuracy, how long you take and where you lose marks.

Practise Mutual FundsFree diagnostic mock

More Mutual Funds questions