Question

Hi

in Treynor ratio for instance if port x return= 10% and RFR= 7% Beta= 1.5  

the Treynor ratio is (10-7)/ 1.5= 2 but if we solved it this way: (0.1-0.07)/ 1.5 = 0.02

i know whether we solve it first or second way we will get the same ranking if we are comparing different portfolios. but

my doubt is, in the exam, how should write the answer,: 2 or 0.02 ?

Answer 1

Treynor Ratio : It evaluates the performance of a portfolio based on the systematic risk of a fund. Treynor Ratio evaluates the performance of a portfolio based on the Systematic Risk of a Fund. Treynor Ratio is based on the premise that Unsystematic Risk can be diversified and hence only incorporates Systematic Risk (beta) to gauge the portfolio's performance.

Treynor Ratio = (Return of Portfolio - Return of Risk free investment) / Beta of Portfolio

In exams you should do the solution in the following manner

Treynor Ratio = (10% - 7%) / 1.5

Treynor Ratio = 2

Therefore you should write the answer : 2