Question

If the return on portfolio A is 10%, the market portfolio return is 12%, the inflation rate is 2%, the risk-free rate is 3%, the standard deviation of the return for portfolio A is 8% and the standard deviation of the return on the market portfolio is 14% and the beta of portfolio A is 0.6, the Treynor ratio for portfolio A will be 0.083.

• A. True
• B. False

Answer 1

Correct answer is (B) False

Variance of portfolio A is also called total risk.And we know that Total risk =Systematic risk+ Non systematic risk

It means Systematic risk cannot be greater than total risk .

Now Variance of portfolio A i.e, Total risk = square of standard deviation=square of 8=64

And systematic risk =Square of beta * variance of market portfolio

=Square of 0.6 *196 =70.56

As we can see that systematic risk calculated above is greater than total risk of portfolio A which is not possible

Therefore ,Given information in question is False