Treynor Ratio
The Treynor Ratio is a measure used to assess how well an investment performs relative to the risk taken. Specifically, it calculates the amount of excess return an investment generates for each unit of risk, as indicated by its beta (which measures market volatility). A higher Treynor Ratio suggests a more favorable risk-adjusted performance, meaning the investment is earning more return for each unit of risk compared to others. Investors use this ratio to compare different investments’ performance while accounting for the risks they involve.
Additional Insights
-
The Treynor Ratio is a measure of investment performance that evaluates how much return an investor earns per unit of risk taken, specifically systemic risk, which is the market risk that cannot be diversified away. It is calculated by taking the difference between the portfolio's return and the risk-free rate, then dividing that by the portfolio's beta, a measure of its volatility compared to the market. A higher Treynor Ratio indicates that an investment is generating more return per unit of risk, making it a useful tool for investors to compare the risk-adjusted performance of different portfolios.