Why should I choose AnalystNotes?
AnalystNotes specializes in helping candidates pass. Period.
Basic Question 7 of 8
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?
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. |

I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!

Barnes
Learning Outcome Statements
calculate and interpret the Sharpe ratio, Treynor ratio, M2, and Jensen's alpha
CFA® 2025 Level I Curriculum, Volume 2, Module 2.