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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

Scheme A and Scheme B have the same 3-year return of 12%. Scheme A has a beta of 1.2 and Scheme B has a beta of 0.8 against the same benchmark. Risk-free rate is 6% and the standard deviations are equal. Using Treynor ratio, which statement is correct?

Scheme B is better, with a Treynor ratio of 7.5 against 5 for Scheme A. Treynor ratio is excess return over the risk-free rate divided by beta: 6 divided by 1.2 gives 5, and 6 divided by 0.8 gives 7.5.

  1. AScheme A Treynor ratio is 5 and Scheme B is 7.5, so B is betterCorrect
  2. BScheme A Treynor ratio is 7.5 and Scheme B is 5, so A is better
  3. CBoth have a Treynor ratio of 6
  4. DScheme A Treynor ratio is 10 and Scheme B is 15, so B is better

Explanation

Treynor ratio = (return - risk-free)/beta. Excess return is 12 - 6 = 6. A: 6/1.2 = 5. B: 6/0.8 = 7.5. Higher Treynor means more excess return per unit of market risk, so B is better. Option with 7.5 for A swaps the betas.

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