Evaluate your investment performance with risk-adjusted return metrics
The Treynor Ratio measures a portfolio's return relative to its beta, representing its risk in relation to the market. It's a key metric for investors aiming to evaluate risk-adjusted returns and compare different investments or portfolios in terms of performance adjusted for market risk. The formula for the Treynor Ratio is:
Treynor Ratio = (Expected Return - Risk-Free Rate) / Beta
Let's consider an example:
Using the Treynor Ratio formula:
Treynor Ratio = (12 - 2) / 1.5 = 6.67
This means the investment has a risk-adjusted return of 6.67, making it a more favorable investment compared to one with a lower Treynor Ratio.
The Treynor Ratio is valuable for investors who want to assess their portfolio performance while considering market risk. It offers insights into how well the portfolio is compensating for the risks taken, particularly in relation to systematic risk (market risk). By using the Treynor Ratio, investors can make better decisions regarding portfolio allocation and strategy.