TREYNOR RATIO

Treynor ratio is basically a return which is earned over the investment in online stock trades in excess as compare to the expected amount or the amount which can be earned at its maximum limits with a risk free investment in online stock trades. This ratio shows the relationship of excess returning value with the risk free investment along with the additional risk taken in online stock trades. In this ratio instead of an overall risk, a systematic ratio is utilized. As high will be the Treynor ratio as much better you will observe the performance in online stock trades. Mathematically, Treynor ratio can be calculated as,
T = γi – γ f
          βi
In the expression;
T refers to a Treynor ratio of online stock trades
γi refers to the return over portfolio in online stock trades
γ f refers to risk free rate of online stock trades
βi refers to beta of portfolio in online stock trades
unlike sharpe ratio, this ratio is not characterized with the feature of quantifying the value added details if available with the management of the portfolio. It is used as a ranking criterion only. Ranking made for the portfolio on the basis of Treynor ratio is useful if the considering portfolios belong to sub portfolios of diverse portfolio in online stock trades. If this condition is not fulfilled in online stock trades market than the portfolios having same systematic risk and different overall risk will be rated as same or identical portfolios in the online stock trades market. And portfolios which are having highest overall risk is supposed to be less diversified and that’s why having high level of unsystematic risk which are not considered as value able in online stock trades market and are not priced. So there is an alternative method which is also used widely which named as, jensen’s Alpha.