Treynor Ratio Calculator

This calculator helps you determine the Treynor Ratio, which measures a portfolio's returns adjusted for systematic risk. Ideal for finance professionals, it leverages the Capital Asset Pricing Model (CAPM) to assess the performance of investment portfolios.

Calculator

Portfolio Return (%)*

Risk-Free Rate (%)*

Portfolio Beta*

Results

Treynor Ratio N/A

Data Source and Methodology

All calculations are based on the principles of modern portfolio theory as detailed in financial texts such as "Principles of Corporate Finance" by Brealey, Myers, and Allen.

The Formula Explained

Treynor Ratio = \( \frac{R_p - R_f}{\beta_p} \)

Glossary of Variables

Portfolio Return (R_p): The total return of the portfolio.
Risk-Free Rate (R_f): The return of a risk-free asset, such as a government bond.
Portfolio Beta (β_p): A measure of the portfolio's volatility relative to the market.

How It Works: A Step-by-Step Example

Assume a portfolio return of 10%, a risk-free rate of 2%, and a portfolio beta of 1.2. Applying the formula:

Treynor Ratio = \( \frac{10\% - 2\%}{1.2} = 6.67\% \).

Frequently Asked Questions (FAQ)

What is the Treynor Ratio?

The Treynor Ratio measures the returns earned in excess of the risk-free rate per unit of market risk.

Why use the Treynor Ratio?

It helps investors understand how well they are compensated for the risk taken relative to a risk-free investment.

What values indicate a good Treynor Ratio?

A higher Treynor Ratio indicates a better risk-adjusted performance.

How is it different from the Sharpe Ratio?

While the Sharpe Ratio considers total risk, the Treynor Ratio adjusts returns based on systematic risk only.

Can the Treynor Ratio be negative?

Yes, if the portfolio's return is less than the risk-free rate.

Tool developed by Ugo Candido. Content reviewed by the CalcDomain Expert Team. Last reviewed for accuracy on: October 15, 2023.

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