Treynor ratio

Definition

The Treynor ratio measures the risk-adjusted return of an investment portfolio by comparing its excess return over the risk-free rate to its beta. It helps investors evaluate how well they are compensated for taking on market risk.

5 Must Know Facts For Your Next Test

1. The Treynor ratio is calculated as (Portfolio Return - Risk-Free Rate) / Beta.
2. A higher Treynor ratio indicates better risk-adjusted performance.
3. It only considers systematic risk, not total risk.
4. Named after Jack Treynor, one of the developers of the Capital Asset Pricing Model (CAPM).
5. Useful for comparing portfolios with different levels of market exposure.

Review Questions

• How is the Treynor ratio calculated?
• What type of risk does the Treynor ratio consider?
• Why might an investor prefer a higher Treynor ratio?

Related terms

Beta:

A measure of a portfolio's volatility in relation to the overall market.

Sharpe Ratio:

A metric for assessing the risk-adjusted return by considering both systematic and unsystematic risks.

Risk-Free Rate:

The theoretical return on an investment with zero risk, typically represented by government bonds.