Urgent basis

Average return of an investor's portfolio is 10%. The risk return for the market is 8%. The beta of the investor portfolio is 1.2. Calculate the Treynor Ratio.
Ans- 2

Treynor's ratio = (Return - RFR)/beta

so it is 1.67 or 2

It should risk free return not risk return

Hi rocket,

I would like to know your views on Capm. I recently read abook 'Portfolio Theory And Capital Markets', and I really don't understand why gave that this man a nobel..?? maybe i m too rude. but I still don't understand how the volatility of the stock(beta coefficient) can be termed as risk..?? it just don't make a sense from investor's point of view.

I was also reading about Markowitz and his modern portfolio theory, He himself said that most of the hedge funds nows with 100s of billion in their AUM are using his theory now. where as I don't think both CAPM or MPT work in practicle. all that come to my mind is charlie munger's advise "man with the hammer syndrome".

let me know if you have ever tried these and they have worked for you in general.

CAPM is a very good tool and I am sure unknowingly you are using.

Lets assume a simple case:

You want to invest in 2 stocks, one has higher systemic risk i.e. beta=1.5 while another one with beta=.5. Through these betas you understand that when economy is expanding your stock with beta=1.5 would perform well as it is exposed to higher systemic risk.

It is nothing but how well your stock correlates with the general market. Now it is up to you to define what is market for you whether you are focused on small cap or mid cap as against large cap. This is an important criterion when you choose any investment manager because he might be able to beat the benchmark but the point is he able to beat the benchmark that corresponds to his style i.e. the risk he is taking? Sharpe ratio could be a useful tool here with certain assumptions.

I use CAPM to come up with discount rate or expected return when I try to value a stock.

Volatility which is defined by standard deviation is different from beta. It would be fair to say that standard deviation is total risk while beta is market exposure risk.


Since most of the hedge funds are trying to find out arbitrage so they can take bets accordingly. A penny of mis-pricing can lead to huge returns for them as they are highly leveraged and they transact a lot. For them, specially for quant funds, MPT is useful because it would let them exploit arbitrage.

MPT would come into practice for portfolio construction where lets say if you are only willing to accept 15% risk then according to MPT you will come up with a portfolio on efficient frontier that will provide you maximum return at that give risk of 15%.

Individual investors show a lot of behavioral biases and hence do not show rational behavior which is primary requirement for MPT.


If you have one stock you might not use MPT (well you could if you combine it with risk free rate)

If you hold two stocks which have less than perfect correlation, you are using MPT as your overall risk is going down for a given return. You use it but you don't realize it.

very nice explanation, have more to add here but later, thanks.