A multi-cap equity fund generates an annualized return of 19.0% with a Beta of 1.30. If the risk-free rate is 6.0%, what is the Treynor Ratio of the scheme?

[ A ]14.62% (Gross return divided by Beta)

[ B ]10.00% (Excess return per unit of Systematic Beta Risk: (19.0% - 6.0%) / 1.30)[ CORRECT ]

[ C ]13.00%

[ D ]1.30

Takeaway

Option B is correct: 10.00% (Excess return per unit of Systematic Beta Risk: (19.0% - 6.0%) / 1.30)

Derivation

Excess return here is R_p − R_f = 19.0% − 6.0% = 13.0%. Treynor Ratio divides this by Beta rather than Standard Deviation: 13.0% / 1.30 = 10.00%. The choice of denominator matters — Treynor assumes the investor already holds a diversified portfolio where unsystematic (fund-specific) risk has been washed out through diversification, leaving only systematic market risk (Beta) as the relevant exposure to compensate for. That makes Treynor the appropriate tool for comparing funds that will sit alongside other holdings, whereas Sharpe suits evaluating a fund in isolation. A frequent slip is forgetting to deduct the risk-free rate before dividing by Beta.

Why the others fail

A — 14.62% (Gross return divided by Beta)

Divides the full 19.0% fund return by Beta without first subtracting the 6.0% risk-free rate, which inflates the ratio above its true value.

C — 13.00%

States the excess return of 13.0% on its own without dividing by Beta, so it measures return magnitude, not risk-adjusted efficiency.

D — 1.30

Quotes the Beta figure of 1.30 directly rather than computing excess return divided by Beta, so it isn't a Treynor Ratio at all.