1. What is the Treynor Ratio?

The Treynor ratio measures risk-adjusted return of an investment portfolio, specifically the excess return per unit of systematic risk (beta). It was developed by Jack Treynor and is particularly useful for comparing the performance of different portfolios or investments.

2. How Does the Calculator Work?

The calculator uses the Treynor ratio formula:

Where:

• \( Return \) — Portfolio return (in decimal form, e.g., 0.08 for 8%)
• \( RiskFree \) — Risk-free rate (in decimal form, e.g., 0.02 for 2%)
• \( Beta \) — Portfolio's beta coefficient (systematic risk)

Explanation: The numerator represents the portfolio's excess return over the risk-free rate, while the denominator represents the portfolio's systematic risk.

3. Importance of Treynor Ratio

Details: The Treynor ratio helps investors understand how much excess return they're receiving for the volatility (systematic risk) they're assuming. Higher values indicate better risk-adjusted performance.

4. Using the Calculator

Tips: Enter all values in decimal form (8% = 0.08). Beta must be greater than zero. The result is unitless - higher values indicate better risk-adjusted performance.

5. Frequently Asked Questions (FAQ)

Q1: What's a good Treynor ratio?
A: There's no absolute standard, but generally higher is better. Compare ratios within the same asset class or market conditions.

Q2: How does Treynor differ from Sharpe ratio?
A: Treynor uses beta (systematic risk) while Sharpe uses standard deviation (total risk). Treynor is better for diversified portfolios.

Q3: What risk-free rate should I use?
A: Typically use short-term government securities (e.g., 3-month T-bills) matching your investment horizon.

Q4: Can Treynor ratio be negative?
A: Yes, if portfolio return is less than the risk-free rate, but interpretation requires caution.

Q5: What are limitations of the Treynor ratio?
A: Only measures systematic risk, assumes CAPM is valid, and requires positive beta.