Accredited Wealth Management Advisor Practice Exam

Question: 1 / 400

Comparing the Treynor ratios of two diversified portfolios, what can be inferred if Portfolio A has a ratio of 1.22 and Portfolio B has a ratio of 0.61?

Portfolio A has better overall performance than Portfolio B

Portfolio A has worse overall performance than Portfolio B

Portfolio A has better performance than Portfolio B on a risk-adjusted basis

The Treynor ratio measures the performance of an investment relative to its systematic risk, which is represented by the beta of the portfolio. A higher Treynor ratio indicates better risk-adjusted performance. In this scenario, Portfolio A has a Treynor ratio of 1.22, while Portfolio B has a ratio of 0.61.

Since Portfolio A's ratio is significantly higher, it implies that for each unit of risk taken (as measured by beta), Portfolio A is earning more excess return compared to Portfolio B. Therefore, we can confidently conclude that Portfolio A has better performance than Portfolio B on a risk-adjusted basis, as it is generating greater returns per unit of risk.

This understanding is crucial for investors who wish to compare the efficiency of different portfolios concerning their exposure to market risk. In this case, Portfolio A provides a more favorable risk-return trade-off than Portfolio B, leading to the inference made in the correct answer choice.

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Portfolio A has twice the performance of Portfolio B

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