The
Treynor Ratio was introduced by Jack L. Treynor. This ratio is used to make exact calculation of the amount of surplus return provided by a unit of risk.
We can also say that the Treynor ratio is used to calculate that extra amount of return that is excess to what would have been earned through safe investments or without taking any kind of risk. The Treynor ratio is developed upon the systematic risk.
The Treynor ratio is also termed as reward to volatility ratio as it measures the earnings made while facing the risks. Whenever the Treynor ratio is on the higher side, it denotes that the investor is provided with high yields by each unit of market risk.
Formula of Treynor Ratio:
T = (rp-rf )/ ß
The Treynor ratio is a kind of rating standard. There are several portfolios that are well diversified and consist of several sub portfolios.
If these sub portfolios are ranked by Treynor ratio, then the sub portfolios would be benefited.
If there is no such portfolio, then those portfolios with same type of systematic risk but various types of total risk are going to be ranked as the same.
At the same time, there are a number of different portfolios that are not diversified and thus, these portfolios are subjected to high amount of risk. These portfolios are rarely preferred by the investors.