Question

Given the following data, what is the expected return of stock B?

Treynor std. dev. beta risk-free

stock 0.212 18% 0.79 2.5%

a. 3.16%

b. 6.32%

c. 9.48%

d. 12.64%

e. 19.25%

Answer 1

e. 19.25%

Treynor's ratio

=

(Expected return of stock - Risk free rate)/beta

0.212

=

(Expected return of stock - 0.025)/0.79

0.16748

=

Expected return of stock - 0.025

Expected return of stock

=

19.25%

Treynor's ratio show the return earned in excess of risk free return for each unit of risk which is "beta" in this case.