Treynor Index

What Is the Treynor Index?

The Treynor Index measures the risk-adjusted performance of an investment portfolio by breaking down a portfolio's excess return for every unit of risk. On account of the Treynor Index, excess return alludes to the return earned over the return that might have been earned in a risk-free investment. (Albeit this is a hypothetical speculation since there are no true risk-free investments.)

For the Treynor Index, the measure of market risk utilized is beta, which is a measure of overall market risk or systematic risk. Beta measures the propensity of a portfolio's return to change in response to changes in return for the overall market. The higher the Treynor Index, the greater the excess return being generated by the portfolio per every unit of overall market risk.

The Treynor Index is otherwise called the Treynor Ratio or the reward-to-volatility ratio.

Formula and Calculation of the Treynor Index

The formula for the Treynor Index/Ratio is:
$\begin&\text=\frac{\text-\text}{\text}\&\textbf\&\text=\text\&\text=\text\&\text=\text\end$

Everything that the Treynor Index Can Say to You

The Traynor Index demonstrates how much return an investment, like a portfolio of stocks, a mutual fund, or exchange-traded fund, earned for the amount of risk the investment assumed. A higher Treynor Index means a portfolio is a more suitable investment. The index is a performance metric that basically communicates the number of units of reward an investor that is given for every unit of volatility they experience.

Like the Sharpe ratio — which utilizes standard deviation as opposed to beta as the risk measure — the fundamental reason behind the Treynor Index is that investment performance must be adjusted for risk to convey an accurate image of performance. The Traynor Index was developed by economist Jack Treynor, an American economist who was additionally one of the creators of the Capital Asset Pricing Model (CAPM).

While a higher Treynor Index might show a suitable investment, investors really must keep at the top of the priority list that one ratio ought not be the main factor depended upon for investing choices. All the more importantly, since the Treynor Index depends on historical data, the data it gives doesn't be guaranteed to demonstrate future performance.

Illustration of the Treynor Index

For instance, expect Portfolio Manager An accomplishes a portfolio return of 8% in a given year, when the risk-free rate of return is 5%; the portfolio had a beta of 1.5. Around the same time, Portfolio Manager B accomplished a portfolio return of 7%, with a portfolio beta of 0.8.

The Treynor Index is in this way 2.0 for Portfolio Manager A, and 2.5 for Portfolio Manager B. While Portfolio Manager A surpassed Portfolio Manager B's performance by a percentage point, Portfolio Manager B really had the better performance on a risk-adjusted basis.

Features

• Excess return alludes to the return earned over the return that might have been earned in a risk-free investment.
• The Treynor Index measures the risk-adjusted performance of an investment portfolio by examining a portfolio's excess return for each unit of risk.
• For the Treynor Index, the measure of market risk utilized is beta, which is a measure of overall market risk or systematic risk.