Question

Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund. However, her portfolio holds only stocks found in the S&P 500 and cash.

Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market timing and security selection skills. At the outset of the year, she became extremely concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market. Taking a bold step, she changed her market allocation. For the entire year her asset class exposures averaged 50% in stocks and 50% in cash. The S&P’s allocation between stocks and cash during the period was a constant 97% and 3%, respectively. The risk-free rate of return was 2%.

One-Year Trailing Returns
	Miranda Fund				S&P 500
Return		10.2	%		-	22.5	%
Standard deviation		37	%			44	%
Beta		1.10				1.00

c. What is the Treynor measure for the Miranda Fund and the S&P 500? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Answer 1

Treynor's measure is the measure / ratio of a Fund's average excess Return to the Fund's beta.

It is also called as Reward to Volatality Measure / Ratio.

Treynor's measure is calculated using the follwing formula :

Treynor Measure (T) = (Return on portfolio - Risk free return) / Beta of the Portfolio

                          = (R_P - R_F) / p

Calculation of Treynor's Measure for Miranda Fund :

R_P = 10.2 %

R_F = 2 %

p = 1.10

Hence Treynor's measure for Miranda Fund = ( 10.2 % - 2 % ) / 1.10 = (8.2 % / 1.10)

                                                               = 7.4545

Calculation of Treynor's Measure for S&P 500 :

R_P = 22.5 %

R_F = 2 %

p = 1.0

Hence Treynor's measure for Miranda S&P 500= ( 22.5 % - 2 % ) / 1.0 = (20.5 % / 1.0)

                                                               = 20.5