Economics Risk And Return Questions Medium
The Treynor ratio is a measure used to assess the risk-adjusted performance of an investment or portfolio. It is calculated by dividing the excess return of the investment or portfolio over the risk-free rate by its beta.
The formula for calculating the Treynor ratio is as follows:
Treynor Ratio = (Return of the Investment/Portfolio - Risk-Free Rate) / Beta
In this formula, the return of the investment or portfolio refers to the actual return achieved, the risk-free rate represents the return on a risk-free investment such as a government bond, and beta measures the sensitivity of the investment or portfolio to market movements.
By dividing the excess return (return above the risk-free rate) by the beta, the Treynor ratio provides a measure of how much excess return an investment or portfolio generates per unit of systematic risk (as measured by beta). A higher Treynor ratio indicates a better risk-adjusted performance, as it suggests that the investment or portfolio is generating higher returns relative to the level of risk taken.