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

Which statement about the Treynor ratio of a mutual fund scheme is correct?

The Treynor ratio divides a scheme'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 over the risk-free rate by standard deviation
  2. BIt divides excess return over the risk-free rate by betaCorrect
  3. CIt divides the scheme return by the benchmark return
  4. DIt divides the scheme's expense ratio by its beta

Explanation

Treynor ratio = (Rp - Rf) / beta, so it uses systematic risk. Dividing by standard deviation describes the Sharpe ratio. The other two are not performance measures defined this way.

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