Calculate the Treynor Ratio to Evaluate Portfolio Performance

The Treynor Ratio function (“TreynorRatio()”) is designed to measure a portfolio’s performance relative to its systematic (market) risk. Unlike the Sharpe Ratio, which uses total volatility, the Treynor Ratio uses the portfolio’s Beta as the risk measure, honing in on market-related (systematic) volatility. By comparing the excess returns (over a risk-free rate) to the portfolio’s Beta, the result helps you see if you are being adequately rewarded for the market risk your portfolio takes on.

Why Use This Function?

• Focuses on Systematic Risk: The function zeroes in on market risk, ignoring unsystematic risk.
• Quick Risk-Adjusted Performance Check: In a single metric, see if your returns adequately compensate for exposure to market movements.
• Insightful for Diversified Portfolios: Especially useful when you hold a broad mix of stocks or ETFs.
• Benchmark Comparison: Compare different portfolios’ Treynor Ratios. If one provides a higher ratio (with similar Beta), it may be more efficient.
• Helps in Strategic Decisions: Optimize portfolio weightings by seeing which allocations yield better payoffs per unit of systematic risk.

How to Use in Excel

Simply type the function into an Excel cell with MarketXLS installed:

=TreynorRatio(Portfolio, [Periods])

• Portfolio can be a text string specifying tickers and their respective weights, for example "MSFT=0.5, AAPL=0.5".
• Periods is optional; if omitted, it defaults to 12. This typically refers to the number of monthly return data points to analyze (e.g., 12 = 12 months of returns).

When you press Enter, MarketXLS sends the request to our backend to calculate the portfolio’s Treynor Ratio and returns the result in the cell.

Parameters Explained

• Note on risk-free rate: The implementation sets this to 0 in the background if not otherwise specified.
• Invalid license or excessive portfolio size (> 500 tickers) triggers an error message like "NA" or "Portfolio size can not exceed 500 tickers".

Example Usage

Basic Examples

1. Equal-weighted 2-stock portfolio (default 12-month period): ????????????????????????????????????????????????????????????????? • In any empty Excel cell:
   =TreynorRatio("MSFT=0.5, AAPL=0.5")
   • MarketXLS calculates the Treynor Ratio for a 12-month window of monthly returns.

2. Mixed portfolio with custom period: ????????????????????????????????????????????????????????????????? • Suppose you want a shorter 6-month horizon:
   =TreynorRatio("MSFT=0.4, AAPL=0.3, GE=0.3", 6)
   • MarketXLS will evaluate 6 months of monthly returns for these tickers, automatically filling missing data or excluding symbols without full coverage.

Advanced Scenarios

1. Portfolio with many tickers: ????????????????????????????????????????????????????????????????? • You can input up to 500 tickers, such as:
   =TreynorRatio("MSFT=0.2, AAPL=0.1, GE=0.15, AMZN=0.25, TSLA=0.15, IBM=0.15")
   • The function automatically prorates weights if they do not total 1 exactly.

2. Dynamic weighting with references: ????????????????????????????????????????????????????????????????? • If cells A1, A2, A3 have weights for MSFT, AAPL, and GE, you can build your text string dynamically:
   =TreynorRatio("MSFT=" & A1 & ", AAPL=" & A2 & ", GE=" & A3, 12)
   • This approach lets you update the ratio whenever you adjust weights in cells A1:A3.

3. Tracking changes over multiple periods: ????????????????????????????????????????????????????????????????? • Use multiple columns referencing the same portfolio to see how the Treynor Ratio changes with different periods:
   =TreynorRatio("MSFT=0.4, AAPL=0.6", 6) in one cell,
   =TreynorRatio("MSFT=0.4, AAPL=0.6", 12) in another, etc.
   • Compare short-term vs. long-term systematic risk-adjusted returns.

Common Questions and Troubleshooting

• What if some tickers do not have data for the specified period?
– The function excludes those tickers automatically. The remaining portfolio gets re-normalized.

• What happens if my portfolio weights add up to zero or I include a non-tradable ticker?
– The function returns “NA” or attempts to rebalance the valid tickers. Ensure you are using valid US stocks/ETFs and positive weight allocations.

• Do I need a specific license?
– A valid MarketXLS license is required. Without it, the function returns an error message or “NA”.

• Can I pass a very large portfolio?
– Yes, up to 500 tickers are currently supported. Beyond that, it returns “Portfolio size can not exceed 500 tickers”.

• Is the ratio annualized?
– The backend calculates monthly returns. While exact annualizing steps for Treynor Ratio are not shown in the snippet, treat it as an overall measure of systematic risk efficiency over the examined period (commonly 12 months).

By using the Treynor Ratio function in Excel with MarketXLS, you gain valuable insight into how well your portfolio’s excess returns match the market-related risk it carries. Take advantage of this function to refine your strategy, balance your systematic risk, and see at a glance if you’re being adequately rewarded for it!