Answers the Question
How much better is an investment than one free of risk?
Calculator for Treynor Ratio
What Is the Treynor Ratio?
Named after Jack Treynor, the Treynor ratio measures the compensation that an investor received from taking on additional risk. The higher the ratio, the greater the reward.
Also known as:
- Reward-to-volatility ratio
- Treynor measure
- Treynor reward to volatility model
Why Is it Important?
- Being able to understand expected and actual returns on investments provides a vital point of feedback for understanding how well investors are compensating for risk, and how much of a premium they expect for doing so.
Formula(s) to Calculate Treynor Ratio
- TREYNOR RATIO = (PORTFOLIO'S RETURN - RISK FREE RETURN) / PORTFOLIO'S BETA
- Assuming that a stock that moves with the market is somehow moving do to its own unique peculiarities. This formula will make such make such incorrect assumptions obvious.