Treynor Portfolio Performance Measure

Albert Lee Chun Portfolio Management 0

 Treynor (1965)
Treynor (1965) developed the first composite measure of
portfolio performance that included risk.
He introduced the portfolio characteristic line, which
defines a relation between the rate of return on a specific
portfolio and the rate of return on the market portfolio.
R p,t p p R M, t p ,t
The beta is the slope that measures the volatility of the
portfolios returns relative to the market.
Alpha represents unique returns for the portfolio.
As the portfolio becomes diversified, unique risk
diminishes.

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 Treynor Measure
A risk-adjusted measure of return that divides a portfolio's excess
return by its beta.

The Treynor Measure is given by

R p rf
Tp =
p
The Treynor Measure is defined using the average rate of return
for portfolio p and the risk-free asset.

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 Treynor Measure

R p rf
Tp =
p

A larger Tp is better for all investors, regardless of their risk

preferences.

Because it adjusts returns based on systematic risk, it is the

relevant performance measure when evaluating diversified
portfolios held in separately or in combination with other
portfolios.

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 Treynor Measure
Beta measures systematic risk, yet if the portfolio is not fully
diversified then this measure is not a complete characterization
of the portfolio risk.
Hence, it implicitly assumes a completely diversified portfolio.
Portfolios with identical systematic risk, but different total
risk, will have the same Treynor ratio!
Higher individual risk should not matter in a diversified
portfolio and hence is not reflected in the Treynor measure.
A portfolio negative Beta will have a negative Treynor
measure.
Also known as the Treynor Ratio.

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 T-Lines

Q has higher alpha, but P has steeper T-line.

P is the better portfolio.

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