A portfolio had a return of 10%, beta of 1.1, and the risk-free rate was 1.25%. What is the Treynor ratio for this portfolio?

A portfolio had a return of 10%, beta of 1.1, and the risk-free rate was 1.25%. What is the Treynor ratio for this portfolio?

• A. .0796
• B. 5.50
• C. .1527
• D. .0993

Answer: (A)

Treynor ratio measures how much excess return a portfolio earns per unit of systematic risk, using beta as the risk yardstick. It is calculated as (Rp − Rf) / β. Plugging in the numbers: Rp = 10% (0.10), Rf = 1.25% (0.0125), so Rp − Rf = 0.0875. With beta β = 1.1, the Treynor ratio = 0.0875 / 1.1 = 0.079545..., which rounds to 0.0796. This value indicates the portfolio earned about 7.96 percentage points of excess return per unit of market risk. The other options would result from either not subtracting the risk-free rate or using a different denominator, which isn’t how the Treynor ratio is defined.

Treynor ratio measures how much excess return a portfolio earns per unit of systematic risk, using beta as the risk yardstick. It is calculated as (Rp − Rf) / β.

Plugging in the numbers: Rp = 10% (0.10), Rf = 1.25% (0.0125), so Rp − Rf = 0.0875. With beta β = 1.1, the Treynor ratio = 0.0875 / 1.1 = 0.079545..., which rounds to 0.0796.

This value indicates the portfolio earned about 7.96 percentage points of excess return per unit of market risk. The other options would result from either not subtracting the risk-free rate or using a different denominator, which isn’t how the Treynor ratio is defined.