Mrs. SRS is your HNI Client and wants to invest in stock market. She has got the following information about individual securities and wants to…

(i) Ranked table using Treynor's Ratio Security R i β i R i - R f (R i - R f ) / β i Ranking A 5 0.5 -2 -4 5 B 25 2.50 18 7.20 3 C 15 1.00 8 8.00 1 D 10 1.50 3 2.00 4 E 20 1.80 13 7.22 2 (ii) Calculation of Cut-off Point Security R-R f β i σ 2 ei (R i -R f )xβ i /σ 2 ei Σ(R i -R f )xβ i /σ 2 ei β 2 i /σ 2 ei Σβ 2 i /σ 2 ei C i C 8 1.0 10 0.80 0.80 0.10 0.10 5.71 E 13 1.80 18 1.30 2.10 0.18 0.28 6.56 B 18 2.50 20 2.25 4.35 0.313 0.593 6.87 D 3 1.50 10 0.45 4.80 0.225 0.818 5.59 A -2 0.50 25 -0.04 4.76 0.01 0.828 5.48 CC = 25 x 0.80 / [1 + (25 x 0.10)] = 5.71 CE = 25 x 2.10 / [1 + (25 x 0.28)] = 6.56 CB = 25 x 4.35 / [1 + (25 x 0.593)] = 6.87 CD = 25 x 4.80 / [1 + (25 x 0.818)] = 5.59 CA = 25 x 4.76 / [1 + (25 x 0.828)] = 5.48 Cut-off Point: 6.87 (iii) The stock whose excess-return to risk ratio (Treynor ratio in (i) above) is above the cut-off point of 6.87 are selected and whose ratios are below are rejected. Hence Security C, E & B are selected in the optimal portfolio while remaining securities i.e D & A are rejected as they are placed below the cut-off point.