CFA Practice Question

There are 294 practice questions for this study session.

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.
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