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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

Which statement about the Treynor ratio is correct?

The Treynor ratio divides the portfolio's excess return over the risk-free rate by its beta. It therefore measures reward per unit of systematic (market) risk, unlike the Sharpe ratio, which uses total risk measured by standard deviation.

  1. AIt divides excess return by the portfolio's standard deviation
  2. BIt divides excess return by the portfolio's betaCorrect
  3. CIt divides excess return by the tracking error
  4. DIt subtracts the benchmark return from the portfolio return

Explanation

The Treynor ratio = (Rp - Rf) / beta, so it uses systematic risk. Dividing by standard deviation gives the Sharpe ratio. Dividing active return by tracking error gives the information ratio.

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