Given the following diversified mutual fund performance data, which fund had the best riskadjusted performance if the risk-free rate of return is 5.7%?
• Fund A: Average rate of return = 7.82%, Standard deviation of annual return = 7.60% and Beta = 0.950
• Fund B: Average annual return = 12.87%, Standard deviation of annual return = 15.75% and Beta = 1.250
• Fund C: Average annual return = 10.34%, Standard deviation of annual return = 18.74% and Beta = 0.857
• Fund D: Average annual return = 7.50%, Standard deviation of annual return = 8.10% and Beta = 0.300
A) Fund B, because the annual return is highest.
B) Fund C, because the Sharpe ratio is lowest.
C) Fund D, because the Treynor ratio is highest.
D) Fund A, because the Treynor ratio is lowest.
Answer:
C.) Fund D, because the Treynor ratio is highest.
Explanation:
Treynor Ratio is a term that explains the rate of excess return that was generated from each of every units, of risk taken on an investment.
It is a method of measuring performance of an investment, so as o determine the excess return; the additional return, obtained, aside the expected return on a risk free investment.
Hence, the higher the rate of Treynor ratio, the better the investment performance under consideration.
