treynor ratio

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    In finance, the Treynor reward-to-volatility model (sometimes called the reward-to-volatility ratio or Treynor measure), named after American economist Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment that has no risk that can be diversified (e.g., Treasury bills or a completely diversified portfolio), per unit of market risk assumed.
    The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better the performance of the portfolio under analysis.


    Formula






    T
    =




    r

    i


    −

    r

    f




    β

    i






    {\displaystyle T={\frac {r_{i}-r_{f}}{\beta _{i}}}}


    where:




    T
    ≡


    {\displaystyle T\equiv }

    Treynor ratio,





    r

    i


    ≡


    {\displaystyle r_{i}\equiv }

    portfolio i's return,





    r

    f


    ≡


    {\displaystyle r_{f}\equiv }

    risk free rate





    β

    i


    ≡


    {\displaystyle \beta _{i}\equiv }

    portfolio i's beta


    Example


    Taking the equation detailed above, let us assume that the expected portfolio return is 20%, the risk free rate is 5%, and the beta of the portfolio is 1.5. Substituting these values, we get the following




    T
    =



    0.2
    −
    0.05

    1.5


    =
    0.1


    {\displaystyle T={\frac {0.2-0.05}{1.5}}=0.1}



    Limitations


    Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market.
    An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security market line in the capital asset pricing model. As these two methods both determine rankings based on systematic risk alone, they will rank portfolios identically.


    See also


    Bias ratio (finance)
    Hansen-Jagannathan bound
    Jensen's alpha
    Modern portfolio theory
    Modigliani risk-adjusted performance
    Omega ratio
    Sharpe ratio
    Sortino ratio
    Upside potential ratio
    V2 ratio


    References

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treynor ratio

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Treynor Ratio: What It Is, What It Shows, Formula To Calculate It

Feb 10, 2025 · The Treynor ratio, also known as the reward-to-volatility ratio, is a performance metric for determining how much excess return was generated for each unit of risk taken on by a portfolio.

Treynor ratio - Wikipedia

The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better the performance of the portfolio under analysis.

Treynor Ratio - Definition, Formula, What It Shows

The Treynor Ratio is a portfolio performance measure that adjusts for systematic - undiversifiable - risk. In contrast to the Sharpe Ratio, which adjusts return with the standard deviation of the portfolio, the Treynor Ratio uses the Portfolio Beta, which is a measure of systematic risk.

Treynor Ratio | Formula + Calculator - Wall Street Prep

Mar 5, 2024 · Often referred to as the “reward-to-volatility ratio”, the Treynor ratio attempts to gauge the risk attributable to a portfolio (and the expected returns) in the context of the total non-diversifiable risk inherent to the market.

Treynor Ratio - What Is It, Formula, Calculations, Vs Sharpe Ratio

Treynor ratio is a metric widely used in finance for calculations based on returns earned by a firm. It is also known as a reward-to-volatility ratio or the Treynor measure. The metric got its name from Jack Treynor, who developed it and used it first. A higher number indicates a more suitable investment or is considered a good Treynor ratio.

Treynor Ratio - Meaning, Formula, Example & Calculation - Groww

What is the Treynor Ratio? Jack Treynor, an eminent American economist and one of the founding fathers of the Capital Asset Pricing Model , developed this metric. It measures the excess returns a financial asset or a group of securities earns …

What Is the Treynor Ratio and How Is It Calculated?

Feb 1, 2025 · The Treynor Ratio assesses how well a portfolio balances risk and return. The calculation starts by determining the portfolio’s excess return, which is the portfolio return minus the risk-free rate.

Treynor Ratio | Definition, Components, Calculation, Applications

May 22, 2023 · The Treynor Ratio, also known as the reward-to-volatility ratio, is a performance measurement that evaluates the return generated by an investment portfolio relative to its systematic risk. A higher Treynor Ratio indicates a better risk-adjusted performance of …

Treynor Ratio Calculator

Oct 8, 2024 · The Treynor ratio, or Treynor measure, is a widely used performance metric that measures how much a portfolio returns are above the risk-free rate by taking on an extra unit of systematic risk. In essence, the Treynor ratio helps you to analyze if the risk you are taking on is rightly compensated.

Treynor Ratio- Meaning, Formula, and More

Dec 1, 2024 · The Treynor Ratio is a financial metric that measures the returns of an investment relative to its systematic risk, represented by beta. It is particularly useful for evaluating the performance of a portfolio or a mutual fund when compared to market benchmarks.