- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 2. Portfolio Risk and Return: Part II
- Subject 7. Portfolio Performance Appraisal Measures
CFA Practice Question
Assume the risk-free rate is 4%. The expected return on the market portfolio is 15% and its standard deviation is 20%. A company has an expected return of 22%, a standard deviation of 40%, and a correlation of 0.8 with the market. What is the company's Treynor ratio?
Correct Answer: 0.1125
β = ρ σi / σM = 0.8 x 0.4 / 0.2 = 1.6
(22% - 4%) / 1.6 = 0.1125
User Contributed Comments 8
| User | Comment |
|---|---|
| johntan1979 | Got a slightly different answer most probably due to rounding: 22 = 4 + (15-4)beta beta = 1.636 .22-.4/1.636 = 0.11 |
| jazzguitar | johntan, you got beta wrong. beta is defined as follows: beta_i = Cov_i,M/sigma^2_M = rho_i,M*sigma_i*sigma_M/sigma^2_M = rho_i,M*sigma_i/sigma_M = 0,8*0,4/0,2 = 1,6 and not 1,636 |
| birdperson | jazz is on it on this one.. |
| tomalot | JT used a different formula: E(Rstock) = Rf + [E(Rm)-Rf] x Beta 22 = 4 + (15 - 4) x Beta Beta = 1.636 Not sure why this answer is different |
| Teeto | because the company may be valued differently from SML, i.e have alpha? |
| Johal1989 | Johntan - no need to complicate matters, just use the formula provided in the answer. Rounding shouldn't be an issue. |
| khalifa92 | the difference in betas might be caused by the correlation, anyone? |
| pigletin | there's no absolute right way to calculate beta. everyone can come up a unique way. but for test just use the formula taught in the book. |