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

Which of the following is true about the Treynor ratio used to evaluate mutual fund schemes?

The Treynor ratio measures excess return over the risk-free rate per unit of systematic risk, which is beta. This distinguishes it from the Sharpe ratio, which uses standard deviation as total risk. It is most suitable for well-diversified portfolios.

  1. AIt measures excess return per unit of total risk measured by standard deviation
  2. BIt measures excess return per unit of systematic risk measured by betaCorrect
  3. CIt measures the difference between fund return and benchmark return
  4. DIt measures the deviation of fund returns from benchmark returns

Explanation

The Treynor ratio is (fund return - risk-free return) divided by beta, so it uses systematic risk. The version using standard deviation is the Sharpe ratio. The difference from benchmark is excess return, and deviation from benchmark is tracking error.

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