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Treynor's theorem

Treynor's theorem posits that the best way to evaluate an investment portfolio is by examining its performance relative to the market risk it takes on. More specifically, it suggests that an investor should look at the excess return of the portfolio—beyond a risk-free rate—divided by its systematic risk, measured by beta. This means that when assessing investment options, one should prioritize those that deliver higher returns for each unit of risk taken, guiding informed decisions in portfolio management and emphasizing the importance of risk-adjusted performance.

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    Treynor's Theorem is a finance concept that helps investors understand how much return they can expect from an investment relative to the risk taken. It emphasizes that investors should focus on the return earned per unit of risk, specifically systematic risk, which is the risk that affects the entire market. By using the Treynor ratio, which compares an investment's excess return to its beta (a measure of market risk), investors can effectively evaluate the performance of different portfolios or funds, facilitating better investment decisions aimed at maximizing returns while managing risk.