What is the Treynor Ratio and how is it calculated?
An example of an AI chatbot conversation about the Treynor Ratio and its calculation.
What is the Treynor Ratio and how is it calculated?
The Treynor Ratio measures a portfolio's return relative to its risk, using beta as the risk measure. It's calculated as (Portfolio Return - Risk-Free Rate) / Beta.
Why is the Treynor Ratio important for investors?
It's important because it helps investors understand how much excess return they are earning for each unit of risk taken, allowing for better investment decisions.
Can you give me an example of how to calculate it?
Sure! If a portfolio has a return of 12%, a risk-free rate of 2%, and a beta of 1.5, the Treynor Ratio would be (12% - 2%) / 1.5 = 6.67.
What are the limitations of the Treynor Ratio?
One limitation is that it only considers systematic risk and assumes that beta is a reliable measure of risk, which may not always be the case.
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