The Treynor Ratio Calculator measures the risk-adjusted return of an investment portfolio concerning its sensitivity to market movements. It is a crucial tool for investors seeking to understand the relationship between the returns generated by their portfolios and the inherent market risks.
Formula of Treynor Ratio Calculator
The Treynor Ratio is calculated using the following formula:
Treynor Ratio = (Rp – Rf) / Beta
Where:
- Treynor Ratio signifies the risk-adjusted return.
- Rp stands for the portfolio’s expected or realized return.
- Rf represents the risk-free rate of return, typically the yield of a government bond.
- Beta denotes the portfolio’s sensitivity to market movements.
This ratio is pivotal in evaluating whether a portfolio has generated returns commensurate with the risks undertaken.
Table of General Terms:
| Term | Description |
|---|---|
| Portfolio Return | The anticipated or actual gain or loss of an investment |
| Risk-Free Rate | The return on a secure, low-risk investment |
| Beta | Measure of investment’s sensitivity to market movements |
This table provides quick reference information for individuals unfamiliar with these terms, aiding in the comprehension and utilization of the calculator.
Example of Treynor Ratio Calculator
Consider a portfolio with an expected return of 10%, a risk-free rate of 3%, and a beta of 1.5. By inputting these values into the Treynor Ratio Calculator, the resulting Treynor Ratio would be calculated as (10% – 3%) / 1.5 = 4.67%.
Most Common FAQs:
The Treynor Ratio helps investors assess whether the returns generated by a portfolio are commensurate with the risks it undertakes, aiding in better decision-making.
A higher Treynor Ratio is generally prefer, as it indicates higher returns per unit of market risk. However, it should be considere in tandem with other metrics for a comprehensive investment analysis.
It’s beneficial to calculate the Treynor Ratio regularly to track the performance of a portfolio and make timely adjustments.