Treynor Ratio Calculator

This page goes into a lot of detail regarding the Treynor Ratio. It includes examples and shows you how to use the calculator appropriately. We’ll also speak about the good and bad things about this ratio so you can use it as a business tool to its fullest. By the end, you’ll know everything there is to know about the Treynor Ratio Calculator and how to use it in real life. Let’s get started and find out more about the Treynor Ratio. Get started with the treynor ratio calculator and see immediate improvements.

A Treynor Ratio Calculator can help you see how effectively a financial plan works. You can identify if the results are because of good money choices or just taking on too much risk by looking at the ratio. It’s crucial for both individual investors and financial advisors because it gives them a consistent tool to compare how well different investment choices are doing. Investors can use this calculator to avoid investments that are very risky and don’t pay off very well. Instead, they can focus on methods that give a better combination.

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Treynor Ratio Calculator

Definition of Treynor Ratio

The Treynor Ratio, also known as the reward-to-volatility ratio, is a technique to see how well a portfolio is doing by looking at how much risk it takes and how much money it makes. People utilize it to find out how much money they are making for every risk they take. To determine the ratio, you divide the portfolio’s additional return by its beta. The additional return is the difference between the portfolio’s return and the rate of return on a risk-free investment. Beta, on the other hand, tells you how much the portfolio changes compared to the market.

The Treynor Ratio is essential because it takes into account systemic risk. Systematic risk is the risk that comes with the whole market, not just one stock. It’s incredibly handy since you can use it to compare portfolios with varying levels of market risk. When the Treynor Ratio is higher, the fund does better for the amount of risk it takes. Investors who want to be confident that their earnings aren’t only because they took on a lot of risk will find this ratio quite useful.

Examples of Treynor Ratio

Let’s look at an example to see how the Treynor Ratio works. Let’s imagine you have two accounts, which we’ll name A and B. Portfolio A has a beta of 1.2 and an excess return of 10%. On the other hand, Portfolio B has a beta of 1.0 and an excess return of 8%. To determine the Treynor Ratios, just divide the additional return by the beta for each portfolio. For Portfolio A, 10% divided by 1.2 is 8.33%. For Portfolio B, the solution is 8% divided by 1.0, which is 8%. Portfolio B has a higher Treynor Ratio, which suggests it does better when you take risk into account, even though it has a lower excess return.

Another example is looking at how well different mutual funds have done. Fund X has a beta of 1.5 and an excess return of 12%. Fund Y has a beta of 2.0 and an excess return of 15%. Fund X has a higher Treynor Ratio, which suggests it gives greater risk-adjusted returns even though its excess return is smaller. This is because 12% / 1.5 is 8% for Fund X and 15% / 2.0 is 7.5% for Fund Y. These examples explain how the Treynor Ratio can help you pick investments that are both secure and make money.

How to calculate Treynor Ratio ?

It’s simple to calculate out the Treynor Ratio. You start by figuring out the portfolio’s excess return, which is the difference between its return and the risk-free rate. This extra return is the extra money you make with the technique compared to the risk-free rate. The next stage is to figure out the portfolio’s beta, which demonstrates how much more or less volatile it is than the market. To determine the Treynor Ratio, divide the additional return by the beta after you have these two figures.

Assume your fund makes 14% a year, has a risk-free rate of 2.5%, and a beta of 1.2. You need to find the excess return before you can find the Treynor Ratio. You can achieve this by taking the portfolio’s return and taking away the risk-free rate. This adds up to 11.5%. Then, you would divide this excess return by the beta to get the Treynor Ratio. In this case, it would be 11.5% / 1.2 = 9.58%. This statistic shows you how much money you’re making for every unit of risk you take. You can perform this over and over again with different portfolios or financial plans to evaluate how well they work.