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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

Which statement best describes the Treynor ratio used in evaluating portfolio managers?

The Treynor ratio measures excess return over the risk-free rate per unit of systematic risk, which is beta. It differs from the Sharpe ratio, which uses total risk through standard deviation, and is most suited to well-diversified portfolios.

  1. AExcess return over the risk-free rate per unit of total risk (standard deviation)
  2. BExcess return over the risk-free rate per unit of systematic risk (beta)Correct
  3. CPortfolio return divided by benchmark return
  4. DExcess return over the benchmark per unit of tracking error

Explanation

Treynor ratio = (Rp - Rf) / beta, so it uses systematic risk. The option using standard deviation describes the Sharpe ratio. The option using tracking error describes the information ratio.

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