CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Which statement regarding Treynor ratio is false?

A. It cannot be applied to assets with negative beta.
B. Portfolios with identical systematic risk but different total risk will be rated the same using Treynor ratio.
C. A portfolio with a Treynor ratio of 0.1 is 2 times better than a portfolio with a Treynor ratio of 0.05.
Correct Answer: C

B. The portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk, which is not priced in the market.

C is false. The ratio can be used to rank portfolios but does not give any information about the economic significance of differences.

User Contributed Comments 6

User Comment
johntan1979 Not sure if I understand C... ranking does not denote significance? Surely a portfolio ranked #1 is better than another one ranked #100?
jonan203 c is probably false because it is an ordinal measurement of comparative portfolios
gill15 Ìt`s a ranking. Doesnt mean Twice as good --- just better.
Marinov By the way, Treynor just passed away
ksarmand Why can the Treynor ratio not be applied to assets with negative beta?
sshetty2 I don't think they are saying that two portfolios with different total risk will be ranked differently. I think they are saying that the Treynor ratio will literally be identical. Looking at the formula, unsystematic risk is not part if it ie. the denominator is beta which is a measure of volatility based on relative systematic volatility only.
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