Given 3.2% monthly return of a stock, 0.2% monthly risk free rate, and beta of 1.5, calculate the Treynor ratio1 point0.010.020.03
Question
Given 3.2% monthly return of a stock, 0.2% monthly risk free rate, and beta of 1.5, calculate the Treynor ratio1 point0.010.020.03
Solution
To calculate the Treynor ratio, we need to follow these steps:
Step 1: Calculate the excess return of the stock. The excess return is the difference between the monthly return of the stock and the risk-free rate. Excess return = Monthly return of the stock - Risk-free rate
Given: Monthly return of the stock = 3.2% Risk-free rate = 0.2%
Excess return = 3.2% - 0.2% = 3.0%
Step 2: Calculate the Treynor ratio. The Treynor ratio is calculated by dividing the excess return by the beta of the stock. Treynor ratio = Excess return / Beta
Given: Beta = 1.5
Treynor ratio = 3.0% / 1.5 = 2.0%
Therefore, the Treynor ratio for the given stock is 2.0%.
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