CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
Portfolio X has a return of 16%, beta of 1.6 and standard deviation of 20%. The risk-free rate is 6%. What is the Treynor ratio of Portfolio X (in percentage points of excess return per unit of beta)?
The Treynor ratio measures excess return per unit of systematic risk. Portfolio X's excess return is 16% minus 6%, or 10%. Dividing by beta of 1.6 gives 6.25. Using standard deviation instead would give the Sharpe ratio of 0.50, which is a different measure.
- A6.25Correct
- B10.00
- C0.50
- D8.00
Explanation
Treynor = (16 - 6) / 1.6 = 10 / 1.6 = 6.25. The value 0.50 is the Sharpe ratio (10/20), which uses standard deviation rather than beta. The value 10.00 ignores beta altogether.
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