This instrument measures a portfolio’s risk-adjusted return relative to the systematic danger, represented by beta. It helps consider how a lot extra return was generated for every unit of market danger taken. For instance, the next worth suggests higher efficiency in managing danger. The calculation entails subtracting the risk-free fee of return from the portfolio’s return and dividing the outcome by the portfolio’s beta.
As a key efficiency indicator, this metric offers worthwhile insights for funding evaluation. It permits traders to match completely different funding choices on a risk-adjusted foundation, resulting in extra knowledgeable decision-making. Launched by Jack L. Treynor within the Nineteen Sixties, this system has turn into a broadly accepted instrument in finance for evaluating portfolio efficiency and guiding strategic asset allocation.