Treynor Ratio Calculator

Calculate your investments' risk-adjusted performance with our Treynor Ratio Calculator. Make informed investment decisions today. Try it now!

Result Treynor Ratio 0

Related Calculators: Sharpe Ratio, Sortino Ratio, Jensens Alpha, Information Ratio, Maximum Drawdown Calculator

Treynor Ratio Formula

The Treynor Ratio is a measure of risk-adjusted performance, named after Jack Treynor, an American economist. It helps investors evaluate the returns they can expect from an investment in relation to the amount of risk they are taking. The formula for calculating the Treynor Ratio is:

Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Beta

Where:

Portfolio Return: The total return earned on the portfolio.
Risk-Free Rate: The rate of return on a risk-free investment, such as U.S. Treasury bonds.
Beta: A measure of the portfolio's volatility relative to the overall market. A beta of 1 indicates that the portfolio's volatility matches that of the market.

The higher the Treynor Ratio, the better the investment has performed relative to its level of risk. However, it's important to note that the Treynor Ratio should not be used in isolation when making investment decisions. It's just one tool among many that investors can use to evaluate the risk and return characteristics of an investment.

Treynor Ratio Example

Let's say you are considering two different mutual funds to invest in. Fund A has an average annual return of 12%, while Fund B has an average annual return of 10%. However, Fund A is much more volatile than Fund B, with a beta of 1.5 compared to Fund B's beta of 1.0.

To calculate the Treynor Ratio for each fund, you would first need to determine the risk-free rate. Let's assume the risk-free rate is 2%. Using the Treynor Ratio formula, the calculations would be as follows:

Treynor Ratio for Fund A = (12% - 2%) / 1.5 = 6.67%
Treynor Ratio for Fund B = (10% - 2%) / 1.0 = 8.00%

Based on the Treynor Ratio, Fund B appears to be the better investment choice because it has a higher return per unit of risk. However, it's important to note that the Treynor Ratio does not consider other types of risk beyond market risk, so it's important to consider other factors as well when making investment decisions.

Ultimately, the Treynor Ratio is a useful tool for evaluating the risk-adjusted performance of investments and can provide valuable insights for investors. By taking into account an investment's level of market risk, the Treynor Ratio can help investors make more informed investment decisions and build more efficient portfolios.

Treynor Ratio vs Sharpe Ratio

The Treynor Ratio and the Sharpe Ratio are both commonly used risk-adjusted performance measures, but they differ in their approach and the type of risk they consider.

The Treynor Ratio focuses on market risk, which is the risk that an investment will underperform the overall market. It measures an investment's excess return per unit of market risk, as represented by beta. The formula for the Treynor Ratio is:

Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Beta

The Sharpe Ratio, on the other hand, considers total risk, which includes market risk as well as other types of risk such as credit risk and liquidity risk. It measures an investment's excess return per unit of total risk, as represented by standard deviation. The formula for the Sharpe Ratio is:

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation

While both ratios are useful for evaluating risk-adjusted performance, the Treynor Ratio is more appropriate for evaluating investments that are primarily affected by market risk, such as stocks. The Sharpe Ratio, on the other hand, is more appropriate for evaluating investments that are affected by a broader range of risks, such as hedge funds or private equity investments.

In summary, the choice between the Treynor Ratio and the Sharpe Ratio depends on the specific investment being evaluated and the types of risks it is exposed to. Both ratios provide valuable information for investors and can help them make more informed investment decisions.