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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Mutual Funds

Mr. Rohit, aged 40, has a moderate risk appetite. A scheme returned 14% in a year with a standard deviation of 10% and a beta of 1.25. The risk-free rate is 6%. Another scheme returned 12% with a standard deviation of 8% and a beta of 0.80. Using the Treynor ratio, which statement is correct?

The second scheme is better on the Treynor ratio. The first scheme gives (14-6)/1.25 = 6.40, while the second gives (12-6)/0.80 = 7.50. A higher Treynor ratio means more excess return per unit of beta, so the second scheme rewards systematic risk better.

  1. AFirst scheme 6.40; second scheme 7.50; the second is betterCorrect
  2. BFirst scheme 0.80; second scheme 0.75; the first is better
  3. CFirst scheme 6.40; second scheme 7.50; the first is better
  4. DFirst scheme 8.00; second scheme 6.00; the first is better

Explanation

Treynor = (Return - Rf)/Beta. First: (14-6)/1.25 = 6.40. Second: (12-6)/0.80 = 7.50. The higher ratio shows better return per unit of systematic risk, so the second is better. The 0.80 and 0.75 values are Sharpe ratios (8/10, 6/8), which use standard deviation instead of beta.

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