Treynor Performance Index

The Treynor Index is a measure with which you may measure the performance of your portfolio over a given period of time. The important aspect of the Treynor Index is that this performance indicator takes into consideration the risk of the portfolio.

In order to use the Treynor Index, you must know three things; the portfolio return, the risk-free rate of return, and the beta of the portfolio. For the risk-free rate of return, you may use the average return (over the period of time) of some government bond or note. The beta of the portfolio is a measure of the systematic risk of the portfolio. Using the beta, rather than the standard deveiation (as in the Sharpe Index), you are assuming that the portfolio is a well diversified portfolio. If you are looking at the return of a mutual fund, this figure is typically available from the fund company itself (this and other measures are also available from the American Association of Individual Investors' Guide to Mutual Funds).

For those of you who want to know the formula for the index;

Treynor = (Portfolio Return - Risk-Free Return) / Beta

Let's use the same example information. A portfolio manager achieved a return of 15.0%, his portfolio had beta measurement of 1.1 and the market achieved a return of 14.6% vs. a risk free rate of return of 7%. To calculate the Jensen Index:

index = (.15 - .07) / 1.1 = 0.0727

To compare, another portfolio manager achieved a return of 13.5% with a beta of .81. The Treynor index for this porfolio manager is:

index = (.135 - .07) / 0.81 = 0.0802

This means that the 2nd portfolio manager out performed the first portfolio manager on a risk-adjusted basis.