Question

Joe is reviewing the investment performance of four mutual funds (A, B, C, and D). Based on a risk-free rate of 3 percent and the systematic risk of each of the portfolios, which one of the funds has the highest systematic risk-adjusted return? (Alternatively, which one has the highest Treynor ratio?)

	Return	Std Deviation	Beta
Portfolio A	10.0%	19.0%	0.90
Portfolio B	12.0%	40.0%	0.70
Portfolio C	18.0%	30.0%	1.25
Portfolio D	22.0%	25.0%	1.80

Answer 1

A

Treynor ratio

=(Return-risk free rate)/Beta

=(10-3)/0.9

=7.78

B

Treynor ratio

=(Return-risk free rate)/Beta

=(12-3)/0.7

=12.86

C

Treynor ratio

=(Return-risk free rate)/Beta

=(18-3)/1.25

=12

D

Treynor ratio

=(Return-risk free rate)/Beta

=(22-3)/1.8

=10.56

Portfolio B has the highest value