1. What is the Treynor Ratio?

The Treynor Ratio is a risk-adjusted performance metric that measures how much excess return was generated for each unit of systematic risk taken. It was developed by Jack Treynor and is particularly useful for evaluating diversified portfolios.

2. How Does the Calculator Work?

The calculator uses the Treynor Ratio formula:

Where:

• \( Portfolio\ Return \) — Total return of the portfolio (in %)
• \( Risk\ Free\ Rate \) — Return of a risk-free asset (in %)
• \( Portfolio\ Beta \) — Systematic risk of the portfolio (unitless)

Explanation: The ratio shows the excess return per unit of market risk. Higher values indicate better risk-adjusted performance.

3. Importance of Treynor Ratio

Details: The Treynor Ratio is important for comparing the performance of different portfolios or funds, especially when they have different levels of systematic risk. It helps investors understand if higher returns are due to smart investment decisions or simply taking on more market risk.

4. Using the Calculator

Tips: Enter portfolio return and risk-free rate as percentages (e.g., 8.5 for 8.5%). Portfolio beta must be greater than 0. All values must be valid numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's a good Treynor Ratio?
A: Higher values are better. A positive ratio means the portfolio outperformed the risk-free rate after accounting for market risk. Compare ratios within the same asset class.

Q2: How is this different from Sharpe Ratio?
A: Sharpe Ratio uses total risk (standard deviation) while Treynor uses only systematic risk (beta). Treynor is better for diversified portfolios.

Q3: What risk-free rate should I use?
A: Typically use 3-month T-bill rate for short-term or 10-year Treasury yield for long-term analysis.

Q4: Can Treynor Ratio be negative?
A: Yes, if portfolio return is less than the risk-free rate, indicating poor performance.

Q5: What are limitations of this ratio?
A: Only measures market risk, assumes CAPM is valid, and requires accurate beta estimation.