Ch.10 · Benchmarks and Performance Evaluation · hard
What is the Treynor Ratio and how does it differ from the Sharpe Ratio?
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EXPLANATION
Treynor Ratio = (Fund Return - Risk-Free Rate) / Beta. It measures excess return per unit of systematic risk (beta/market risk). Unlike Sharpe which uses total risk (standard deviation including unsystematic risk), Treynor only considers systematic risk. It is more appropriate for evaluating diversified portfolios where unsystematic risk has been eliminated.
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