The Treynor measure explained.
If you’re trying to find a good investment portfolio, then you may want to look at the Treynor measure. Similar to the Sharpe ratio, the Treynor measure is useful for ranking portfolios based on the amount of return you will get back compared to the risks you take. Therefore, if you’re thinking of joining a mutual fund, then you should probably be looking at some of these factors before you make your final decision.
The Treynor measure differs from the Sharpe ratio in a few key ways. First of all, while the Sharpe ratio takes the standard deviation of the different funds, stocks and bonds in the portfolio, the Treynor measure uses the “Beta” instead. Essentially, the Treynor measure is useful for determining whether or not the systematic risk of a mutual fund is worth the return.
Another difference between the Treynor measure and the Sharpe ratio is that these two ratios are useful for comparing different types of mutual funds. The Sharpe ratio is best for mutual funds that are exclusive of one another – for instance, funds that only own different stocks and bonds, or funds that are exclusively in separate industries. On the other hand, the Treynor measure is best for comparing funds that work well together, for example, if you were going to compare different portions of the same portfolio.
The Treynor measure is calculated by large companies sometimes. Therefore, you will probably only be able to compare the Treynor ratios if they have already been calculated.
While the ratio itself is easy to calculate, you will need the Beta of the particular fund that you are calculating this index for. The Beta is difficult to calculate and it requires a regression analysis. Once you have the Beta for a particular investment portfolio, however, the calculation is simple. Just subtract the risk-free state of return from the return you would get on a normal fund, and then divide that by the Beta.
If you are trying to find the best mutual fund, you will have to know whether or not you are looking for a high risk investment. If you are trying to avoid risks (for instance, for a retirement fund) then you should look for high Treynor measure values.