Download Tax Saving Mutual Fund Application Forms
Invest In Tax Saving Mutual Funds Online
Leave a missed Call on
94 8300 8300
Treynor Ratio
Treynor ratio evaluates the performance of a portfolio based on the systematic risk of a fund. Treynor ratio is based on the premise that unsystematic or specific risk can be diversified and hence, only incorporates the systematic risk (beta) to gauge the portfolio's performance. The ratio can be expressed as excess return generated by the fund over the risk free rate divided by the systematic risk or beta.
Treynor ratio=(Rp-Rf)/β
Where, Rp=return on the portfolio, Rf= risk free rate and β= portfolio beta
The Treynor ratio considers the return (excess return generated over risk free return) of a fund in relation to the portfolio risk that the fund manager has taken (beta) in order to achieve that incremental return.
When comparing two funds, if you find a fund that has produced higher return, you would normally opt for that fund. But, if you were to take a risk-adjusted approach, you would consider not only the incremental return but also the incremental market risk that the fund manager took to achieve this higher return. That's where you look at the Treynor ratio in order to determine which fund to choose - on a risk adjusted basis.
A better fund would have a higher Treynor ratio.
In the illustration discussed earlier, beta of Fund A and B are 1.5 and 1.1 respectively,
Treynor ratio for fund A= (30-8)/1.5=14.67%
Treynor ratio for fund B= (25-8)/1.1= 15.45%
The results are in sync with the Sharpe ratio results.
Both Sharpe ratio and Treynor ratio measure risk adjusted returns. The difference lies in how risk is defined in either case. In Sharpe ratio, risk is determined as the degree of volatility in returns - the variability in month-on-month or period-on-period returns - which is expressed through the standard deviation of the stream of returns numbers you are considering. In Treynor ratio, you look at the beta of the portfolio - the degree of "momentum" that has been built into the portfolio by the fund manager in order to derive his excess returns. High momentum - or high beta (where beta is > 1) implies that the portfolio will move faster (up as well as down) than the market.
While Sharpe ratio measures total risk (as the degree of volatility in returns captures all elements of risk - systematic as well as unsystemic), the Treynor ratio captures only the systematic risk in its computation.
When one has to evaluate the funds which are sector specific, Sharpe ratio would be more meaningful. This is due to the fact that unsystematic risk would be present in sector specific funds. Hence, a truer measure of evaluation would be to judge the returns based on the total risk.
On the contrary, if we consider diversified equity funds, the element of unsystematic risk would be very negligible as these funds are expected to be well diversified by virtue of their nature. Hence, Treynor ratio would me more apt here.
It is widely found that both ratios usually give similar rankings. This is based on the fact that most of the portfolios are fully diversified. To summarize, we can say that when the fund is not fully diversified, Sharpe ratio would be a better measure of performance and when the portfolio is fully diversified, Treynor ratio would better justify the performance of a fund.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
Leave your comment with mail ID and we will answer them
OR
You can write back to us at
PrajnaCapital [at] Gmail [dot] Com
---------------------------------------------
Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs
Download Mutual Any Fund Application Forms
---------------------------------------------
Best Performing Mutual Funds
- Largecap Funds Invest Online
- DSP BlackRock Top 100 Fund
- ICICI Prudential Focused Blue Chip Fund
- Franklin India Bluechip
- ICICI Prudential Top 100 Fund
B. Large and Midcap Funds Invest Online
- ICICI Prudential Dynamic Plan
- HDFC Top 200 Fund
- UTI Dividend Yield Fund
- Birla Sun Life Front Line Equity Fund
- Franklin India Prima
C. Mid and SmallCap Funds Invest Online
- Reliance Equity Opportunities Fund
- DSP BlackRock Small & Midcap Fund
- Sundaram Select Midcap
- IDFC Premier Equity Fund
- Birla Sun Life Dividend Yield Plus
- SBI Emerging Businesses Fund
- HDFC Mid-Cap Opportunities Fund
- ICICI Prudential Discovery Fund
D. Small and MicroCap Funds Invest Online
- DSP BlackRock MicroCap Fund
2. Franklin India Smaller Companies
E. Sector Funds Invest Online
- Reliance Banking Fund
- Reliance Banking Fund
- ICICI Prudential Banking and Financial Services Fund
F. Tax Saver Mutual Funds Invest Online
1. ICICI Prudential Tax Plan
2. HDFC Taxsaver
- DSP BlackRock Tax Saver Fund
- Reliance Tax Saver (ELSS) Fund
G. Gold Mutual Funds Invest Online
- Relaince Gold Savings Fund
- ICICI Prudential Regular Gold Savings Fund
- HDFC Gold Fund
- Birla Sun Life Gold
H. International funds Invest Online
1. Birla Sun Life International Equity Plan A
2. DSP BlackRock US Flexible Equity
3. FT India Feeder Franklin US Opportunities
4. ICICI Prudential US Bluechip Equity
5. Motilal Oswal MOSt Shares NASDAQ-100 ETF
No comments:
Post a Comment