Treynor Ratio and Sharpe Ratio

The Treynor Ratio and the Sharpe ratio (Sharpe index) where created to measure the returns earned that were in excess of what could have been earned on a risk free investment such as t-bills. In other words they measure the extra returns you can make by taking on the extra risk of investing in a mutual fund vs. a t-bill.

The Treynor ratio was developed by Jack Treynor. The formula looks like this.

(Average Rate of Return – Average return on T-bills)/Beta if the portfolio

The Sharpe ratio was created by William F. Sharpe. Its formula looks like this.

(Average Rate of Return – Average Return on t-bills)/(Portfolio Standard Deviation)

Both are widely used on mutual funds as a way to measure a portfolio’s performance and risk.

Return From Treynor Ratio and Sharpe Ratio to Types of Mutual Funds