Treynor Ratio Calculator
Treynor Ratio Calculator
Treynor Ratio Calculator helps calculating the Treynor Ratio.
What is Treynor Ratio?
The Treynor Ratio was developed by Jack Treynor, an American economist who was one of the inventors of the Capital Asset Pricing Model (CAPM).
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.
The Treynor ratio is the average return above the risk-free rate of return on an investment.
The risk free rate of return can be an investment such as a U.S. Treasury investment or a diversified portfolio.
The Formula of Treynor Ratio
| Treynor ratio = |
|
where:
E(Rp) is an expected return of portfolio p
rf is a risk-free rate
βp is a nondiversifiable or systematic risk of portfolio p
Interperating Treynor Ratio
A high treynor ratio means that the investment is making a lot of money above the risk-free rate of return.
A low treynor ratio means that the investment is making only a little money above the risk-free rate of return.
A negative treynor ratio means that the investment is making less money than risk-free investment such as a US Treasury or diversified investment.
Example of Treynor Ratio
For example: if the expected return of portfolio P equals to 20.00%, the risk-free rate equals to 4.00% and the Beta equals to 0.50,
The Treynor Ratio equals to 32.00%:
| 20 - 4 |
| 0.5 |