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Explanation:
The Treynor measure is the difference between the stock return and the risk-free rate divided by the stock's Beta:
Ketrick Fertilizer's Treynor Ratio =
Sanbros Chemical's Treynor Ratio =
Investors want more excess return per unit of systematic risk or Beta. Given only this information, this pension fund manager should choose Ketrick Fertilizer because it has a higher Treynor measure.
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Q.3181 Graham Cook is an investment analyst at Gabriel Fund. He is assisting his portfolio manager in stock selection. He is currently considering two stocks for long-term investment. The first stock, Ketrick Fertilizer, has an expected return of 16% and a Beta of 1.6 with the market. The second stock, Sanbros Chemical, has an expected return of 13% and a Beta of 1.2 with the market. If the current risk-free rate is 6.7%, which stock should be included in the portfolio?
A
Sanbros Chemicals because it has a lower Treynor measure.
B
Sanbros Chemicals because it has a higher Treynor measure.
C
Ketrick Fertilizer because it has a higher Treynor measure.
D
Ketrick Fertilizer because it has a lower Treynor measure.