What does a higher Treynor Ratio indicate about an investment?

What does a higher Treynor Ratio indicate about an investment?

• A. A more suitable investment
• B. A less suitable investment
• C. Higher volatility
• D. Lower expected returns

Answer: (A)

The Treynor Ratio measures the performance of an investment relative to its risk, specifically focusing on systematic risk as represented by beta. A higher Treynor Ratio indicates that an investment has generated more excess return per unit of systematic risk taken on. This suggests that the investment is potentially more suitable as it rewards investors better relative to the amount of risk they are exposed to. Investors typically seek to maximize their returns while minimizing risk, and the Treynor Ratio serves as a valuable tool for making those evaluations. When the ratio is high, it signals that an investment is not only performing well but is doing so efficiently concerning its risk profile. Therefore, a higher Treynor Ratio is compelling for investors who prioritize risk-adjusted returns, supporting the understanding that the investment is more suitable.

The Treynor Ratio measures the performance of an investment relative to its risk, specifically focusing on systematic risk as represented by beta. A higher Treynor Ratio indicates that an investment has generated more excess return per unit of systematic risk taken on. This suggests that the investment is potentially more suitable as it rewards investors better relative to the amount of risk they are exposed to.

Investors typically seek to maximize their returns while minimizing risk, and the Treynor Ratio serves as a valuable tool for making those evaluations. When the ratio is high, it signals that an investment is not only performing well but is doing so efficiently concerning its risk profile. Therefore, a higher Treynor Ratio is compelling for investors who prioritize risk-adjusted returns, supporting the understanding that the investment is more suitable.