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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds

Fund A and Fund B both have a Treynor-based comparison over the same period. Fund A: return 15%, beta 1.5; Fund B: return 12%, beta 0.8. The risk-free rate is 6%. Which statement is correct?

Fund B has the higher Treynor ratio. Fund A scores (15−6)/1.5 = 6%, while Fund B scores (12−6)/0.8 = 7.5%. Fund B therefore earns more excess return per unit of systematic risk, despite Fund A's higher absolute return.

  1. AFund B has the higher Treynor ratio, 7.5% against 6% for Fund ACorrect
  2. BFund A has the higher Treynor ratio, 10% against 7.5%
  3. CBoth funds have the same Treynor ratio
  4. DFund A has a Treynor ratio of 6% and Fund B of 9%

Explanation

Treynor ratio = (Return − Risk-free)/Beta. Fund A = (15−6)/1.5 = 6.0. Fund B = (12−6)/0.8 = 7.5. So Fund B gives more excess return per unit of systematic risk, even though Fund A has the higher raw return. Dividing by return instead of beta or omitting the risk-free rate produces the wrong figures in the other options.

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