How to Calculate Treynor Square Ratio?



This article will explain How to Calculate Treynor Square Ratio?

What is Treynor Square Ratio?

In Finance, the Treynor Square ratio is the difference between expected return of market portfolio, and the expected return of portfolio with the same beta (1) as the market portfolio.

The portfolio with the same beta includes the risky portfolio (P) and the risk free rate, with the following proportion:

βM

βp

=

1

βp

The Formula of Treynor Square Ratio

Treynor Square ratio =

E(rM*) - E(rM) βp

where:

E(r_M*) is an expected return of portfolio with the same risk as the market portfolio

E(r_M) is an expected return of Market portfolio

How to Calculate Treynor Square Ratio?

First Step: Find β_p - the beta of the portfolio

Second Step: Find the relation between β_M , which equals 1, and β_p:

Divide 1 by β_p

Third Step: Find the expected return of a portfolio which includes the proportion found in Step 2, invested in risky portfolio, and 1 minus the proportion found in Step 2, invested in risk free asset.

Fourth Step: Find the difference between the expected return, found in Step 3 and expected return of market portfolio.

To find out How to Calculate Treynor Square Ratio you could also use our Treynor Square Ratio calculator

The expected return of portfolio P %

The Beta of portfolio P

The risk-free rate %

The expected return of Market portfolio (M) %

Treynor Square Ratio Calculator helps calculating the Treynor Square Ratio.

Interperating Treynor Square Ratio

A high treynor Square ratio means that the investment is better.