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Investors can use certain metrics to acess a stock or stock portfolio’s risk. One of them...

Investors can use certain metrics to acess a stock or stock portfolio’s risk.

One of them is the Treynor ratio.

What is the ratio and what is unique in its measurement?
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Answer #1

Treynor ratio measures the excess return generated per unit of systematic risk.

Treynor Ratio = (Portfolio return - Risk Free Rate)/Portfolio Beta

The amount invested in a stock could have been invested in Treasury Bills yielding risk free return,but since the amount has been invested in a portfolio which has risk attached to it, it must provide higher return than the treasury bills.

Hence, this ratio measures how much excess return has been generated per unit of systematic risk taken i.e. Beta

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