You are provided the following information related to the Three Stooges Investme

Question

You are provided the following information related to the Three Stooges Investment Funds, Ltd. Portfolio Manager Larry Curly Moe Portfolio Metrics Total Return Beta Standard Deviation Correlation Risk-Free Rate Equity Risk Premium AAA Bond Rate 10.0% 0.9 12.0% 0.3 4.0% 8.5% 9.5% 14.0% 1.5 30.0% 0.6 4.0% 8.5% 9.5% 8.0% 0.8 0% 0.4 4.0% 8.5% 9.5% 10. STS OW ALLWOR Based on he above data, calculate the Tre nor Ratio for the Lam and Cur funds. How do they com are explain h at the ratio is measures and be spec 2 0 / TO RECEIVE CREDIT. MAKE SURE YOU USE AT LEAST 4 DECIMAL PLACES (WHERE APPLICABLE) TO ELIMINATE POTENTIAL ROUNDING ERRORS.

Explanation / Answer

Answer:

Treynor ratio = (Portfolio return - risk free rate)/ Portfolio beta

Treynor ratio for Larry = (10% - 4%) / 0.9 = 0.0667

Treynor ratio for Curly = (14% - 4%) / 1.5 = 0.0667

Treynor ratio is reward-to-volatility ratio and measures return earned in excess over the risk-free rate of return with the additional risk that has been taken. Both the portfolios Larry and Curly have the same Treynor ratio; hence provides similar excess returns (over risk free return) with additional risk taken.

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