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The Short Answer

Is This the Best Way to Judge Risk/Return?

We round out our series on investment ratios with a primer on the Treynor Ratio.

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Question: I have become more familiar with the Sharpe and Sortino ratios, but what about the Treynor ratio, which is also featured on Morningstar.com?

Answer: Developed by Jack Treynor, the Treynor ratio (also known as the "reward-to-volatility ratio") is available alongside a number of other risk-adjusted return measures under the "MPT Statistics" heading on the "Ratings and Risk" tab for each mutual fund.

Like the other risk/return metrics we've discussed so far, Treynor attempts to measure how well an investment has compensated its investors given its level of risk. The Treynor ratio relies on beta, which measures an investment's sensitivity to market movements, to gauge risk. The premise underlying the Treynor ratio is that systematic risk--the kind of risk that is inherent to the entire market (represented by beta)--should be penalized because it cannot be diversified away.

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Esther Pak does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.