ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Treynor ratio, also known as the reward-to-volatility ratio, is a performance metric for determining how much excess return was generated for each unit of risk taken on by a portfolio.

Detailed explanation-2: -The Sharpe ratio is a measure of volatility-adjusted performance and is calculated by dividing excess return by the standard deviation of excess return. Excess return is defined as the return in excess of the risk-free rate of return-for example, the three-month T-bill rate.

Detailed explanation-3: -The Treynor ratio measures the excess return per unit of risk. It is calculated as the ratio of the portfolio’s return over the risk-free rate, minus the market’s expected return, to the portfolio’s beta. The Treynor ratio is named after Jack Treynor, who first proposed the measure in 1962.

Detailed explanation-4: -Both the Sharpe and Treynor Ratios are used to understand an investment’s risk-adjusted return. The Sharpe Ratio divides the excess return by the investment’s standard deviation. The Treynor Ratio instead divides excess returns by the investment’s Beta.

Detailed explanation-5: -Sharpe Ratio It is calculated by taking the return of the investment, subtracting the risk-free rate, and dividing this result by the investment’s standard deviation. All else equal, a higher Sharpe ratio is better.