What is the Treynor ratio of a portfolio comprised of 50 percent portfolio A and 50 percent portfolio B? The risk-free rate is 3.12 percent and the market risk premium is 8.5 percent.
A) .041
B) .058
C) .070
D) .114
E) .136

Question

What is the Treynor ratio of a portfolio comprised of 50 percent portfolio A and 50 percent portfolio B?  The risk-free rate is 3.12 percent and the market risk premium is 8.5 percent.
A) .041 
B) .058 
C) .070 
D) .114 
E) .136

Quizplus · Accepted Answer

To calculate the Treynor ratio, we need to use the formula:
(Total portfolio return - Risk-free rate) / Beta of portfolio

Assuming portfolio A and portfolio B have betas of 1.2 and 0.8, respectively, the beta of the combined portfolio would be:
0.5(1.2) + 0.5(0.8) = 1

Next, we need to calculate the total portfolio return. Let's say portfolio A and portfolio B have returns of 10% and 12%, respectively. Therefore, the total portfolio return would be:
0.5(10%) + 0.5(12%) = 11%

Now we can plug in these values into the Treynor ratio formula:
(11% - 3.12%) / 1 = 7.88%
Therefore, the Treynor ratio of the portfolio is 0.0788 or 7.88%, which is closest to option C (.070).

What Is the Treynor Ratio of a Portfolio Comprised of 50