1. What is the Treynor Ratio?

Definition: The Treynor ratio measures risk-adjusted performance of a portfolio by dividing excess returns over the risk-free rate by the portfolio's beta.

Purpose: It helps investors evaluate how much excess return was generated for each unit of market risk taken.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( TR \) — Treynor ratio (dimensionless)
• \( R_p \) — Portfolio return (%)
• \( R_f \) — Risk-free rate (%)
• \( \beta \) — Beta coefficient (measures systematic risk)

Explanation: The numerator represents the portfolio's excess return over the risk-free rate, while the denominator represents the portfolio's market risk.

3. Importance of the Treynor Ratio

Details: A higher Treynor ratio indicates better risk-adjusted performance. It's particularly useful for comparing diversified portfolios.

4. Using the Calculator

Tips: Enter the portfolio return (%), risk-free rate (%), and beta coefficient. Beta must be greater than 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good Treynor ratio?
A: Higher values are better. Compare to similar investments or benchmarks. Positive values indicate the portfolio outperformed the risk-free rate.

Q2: How is this different from the Sharpe ratio?
A: The Sharpe ratio uses standard deviation (total risk) while Treynor uses beta (systematic risk only).

Q3: What risk-free rate should I use?
A: Typically use short-term government securities (like 3-month T-bills) matching your investment horizon.

Q4: Can the Treynor ratio be negative?
A: Yes, if the portfolio underperforms the risk-free rate, the ratio will be negative.

Q5: What if my beta is zero?
A: Beta cannot be zero in this calculation (division by zero). For beta=0, the concept doesn't apply as there's no market risk.