What is Treynor Ratio?
The Treynor ratio is a valuation metric that compares the returns of a fund to its beta. In other words, it measures how much riskier or less risky your fund is compared to the market as a whole. The Treynor ratio can help you understand whether your investment portfolio is overvalued or undervalued relative to its benchmark index. It’s also useful for measuring investment performance against similar funds in its peer group.
What is a Treynor Ratio Calculator?
The Treynor Ratio Calculator is a tool used to calculate the Treynor Ratio, a measure of how much an investment’s performance is due to its beta and how much it’s due to its alpha. The higher your Treynor Ratio, the more likely it is that your investment has outperformed because of skill rather than luck.
How to Calculate Treynor Ratio?
To calculate the Treynor ratio, divide the return of a portfolio by its beta.
The formula for calculating Treynor ratio is as follows: (annualized return – risk free rate) / beta
How Does this Treynor Ratio Calculator Work?
The Treynor ratio calculator calculates the return on a portfolio relative to the risk of a benchmark, and takes into account both market movement and manager skill. A high Treynor ratio indicates that an asset manager has performed well relative to their peers, while a low Treynor ratio indicates that they have underperformed.
To calculate your own Treynor Ratio:
- enter your net monthly investment return
- enter your net monthly investment volatility (standard deviation)
Example of Treynor Ratio Calculator
Let’s use the Treynor ratio calculator to see how it works in practice.
Let’s assume you have a stock portfolio worth $1 million, and that you’ve invested 80% of your money in stocks and 20% of your money in bonds. Let’s also assume that the market has performed well over the last five years—your stocks have increased by 15%, while your bonds have increased by 5%.
Now let’s plug those numbers into our calculator:
In Excel: =TREYNOR(B2:I2) where B2-I2 are cells containing a list of prices from one period (for example 2014), and C is a cell containing either “S” or “B”. The formula will output a number between 0-100 representing how risky this portfolio is relative to its benchmark (the market).
In C++: std::string s = get_output(std::map&);
This will output an std::string value representing how risky this portfolio is relative to its benchmark (the market).
What is a good Treynor ratio?
The higher the Treynor ratio, the better. But here are some general guidelines for what you should be aiming for:
- < 1 is bad and a sign of a bad fund manager
- 1 – 3 is OK but not great
- 3 – 5 is good and above average
How do you interpret Treynor ratio?
The Treynor Ratio is a measure of risk-adjusted return that accounts for the volatility of an investment. This can be interpreted as follows:
- If your Treynor Ratio is greater than its benchmark, it means that your portfolio is earning more return per unit of risk than the market average.
- If your Treynor Ratio is less than its benchmark, it means that your portfolio is earning less return per unit of risk than the market average.
Difference between Treynor Ratio and Sharpe Ratio
The Treynor ratio is a measure of the performance of a portfolio relative to the market. It is calculated by subtracting the risk free rate from the portfolio’s excess return over a period of time, dividing the result by its beta (also known as the standard deviation), and multiplying by 100.
The Sharpe ratio is another measure of portfolio performance that uses only returns, but not risk adjusted returns. It is calculated by dividing excess returns (that is, returns minus expected returns) by volatility (standard deviation).
Conclusion
We hope this Treynor Ratio Calculator has been helpful for you to calculate the ratio on your own. Please leave a comment below if you have any questions or would like any assistance with this calculator.
FAQs
Is a higher Treynor ratio better?
Yes, a higher ratio is better. A higher Treynor ratio means the fund is more profitable and efficient.
Is a negative Treynor ratio bad?
While a negative Treynor ratio isn’t necessarily bad, it is a helpful indicator that something may be wrong with your strategy. In general, a negative Treynor ratio indicates that your risk tolerance has increased more than expected or that your portfolio is not performing as well as it could be.
