Like Mutual Fund Sharpe Ratio, Treynor Ratio also measures the risk-adjusted returns of Mutual Fund. It was developed by Jack Lawrence Treynor of America.
Meaning of Treynor Ratio
Treynor Ratio, also called risk-to-reward ratio, takes into account risk of the Mutual Fund and returns generated thereby. Although it is similar to Sharpe Ratio, the difference is that unlike Sharpe Ratio, which uses Mutual Fund Standard Deviation, the Treynor Ratio uses Mutual Fund BETAfor calculation of risk-adjusted returns. Also, Sharpe Ratio takes into account total risk into account, Treynor Ratio takes only systematic risk into account.
Use of Treynor Ratio for investor
Let us just forget technical jargons and note in simple language that a Mutual Fund with higher Treynor Ratio will give more risk-adjusted returns, but it should be used in conjunction with other parameters. It should be used to evaluate Mutual Funds of similar category.