- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 4. Applications of the CAPM

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**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 / σ

_{M}= 0.8 x 0.4 / 0.2 = 1.6(22% - 4%) / 1.6 = 0.1125

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**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. |