Similar to the Sharpe Ratio, the Treynor Ratio
is a measurement of efficiency utilizing the relationship between annualized risk-adjusted return and risk.
To obtain the third group of performance measures, we use the average weekly portfolio return adjusted for the risk free rate divided by the standard deviation of returns and the estimated market beta to get the Sharpe Ratio and Treynor Ratio
The second performance measure is the Treynor ratio
(9) which also measures the excess return per unit of risk.
These composite portfolio performance measures are the Sharpe ratio, the Treynor ratio
, the Jensen's alpha measure, and the information ratio.
In order to evaluate both the performance and risk character of microfinance investment funds we shall use three risk measures, the standard deviation of returns of a portfolio, the historical portfolio beta coefficient and the R-squared of a portfolio as well as three performance measures largely adopted in the financial literature--so called Jensen's alpha, the Sharpe ratio and the Treynor ratio
The analysis has been made on the basis of mean return, beta risk, co-efficient of determination, Sharpe ratio, Treynor ratio
and Jensen Alpha.
Using market portfolio as a benchmark, some commonly used measures for evaluating the performance of the portfolios of stocks are Ex Post Alpha or Jensen's Coefficient (Jensen 1968), Reward-to-Volatility Ratio (RVOL) or Treynor Ratio
(Treynor 1965), and Reward-to-Variability Ratio (RVAR) or Sharpe Ratio (Sharpe 1966).
While the Sharpe ratio uses standard deviation measure of total risk (comprising systematic and non-systematic components), the Treynor ratio
uses CAPM's beta as relative measure of systematic risk to divide fund risk premium.
uses Beta as a risk measure hence considers the Systematic risk.
The Treynor Ratio
is similar the Sharpe Ratio, but it uses beta as a measure of risk:
Merlin's new reporting functionality is available for the full range of measurements that investors demand, including Sharpe ratio, Treynor ratio
, volatility, skew on returns, Alpha and Beta versus benchmark (including customized and blended benchmarks), up and down capture ratios, Sortino ratio and drawdown.
The calculation of the Sharpe and Treynor ratios
assumed a risk-free rate of zero to simplify the calculations.