You want to evaluate three mutual funds using the Treynor measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, in addition to information regarding the S&P 500 Index. $$\begin{array} { c c r r }
& \begin{array} { c }
\text { Average } \
\text { Return }
\end{array} & \begin{array} { r }
\text { Standard } \
\text { Deviation }
\end{array} & \text { Beta } \
\hline \text { Fund A } & 13 \% & 10 \% & 0.5 \
\text { Fund B } & 19 \% & 20 \% & 1.0 \
\text { Fund C } & 25 \% & 30 \% & 1.5 \
\text { S\&P 500 } & 18 \% & 16 \% & 1.0
\end{array}$$ The fund with the highest Treynor measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).

Question

You want to evaluate three mutual funds using the Treynor measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, in addition to information regarding the S&P 500 Index. $$\begin{array} { c c r r } 
& \begin{array} { c } 
\text { Average } \
\text { Return }
\end{array} & \begin{array} { r } 
\text { Standard } \
\text { Deviation }
\end{array} & \text { Beta } \
\hline \text { Fund A } & 13 \% & 10 \% & 0.5 \
\text { Fund B } & 19 \% & 20 \% & 1.0 \
\text { Fund C } & 25 \% & 30 \% & 1.5 \
\text { S\&P 500 } & 18 \% & 16 \% & 1.0
\end{array}$$ The fund with the highest Treynor measure is
A) Fund A. 
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).

Quizplus · Accepted Answer

The Treynor measure is calculated as (Average Return - Risk-Free Rate) / Beta. For Fund A, it is (13% - 6%) / 0.5 = 14%. For Fund B, it is (19% - 6%) / 1.0 = 13%. For Fund C, it is (25% - 6%) / 1.5 = 12.67%. Fund A has the highest Treynor measure.

You Want to Evaluate Three Mutual Funds Using the Treynor