Now we discuss another important metrics that is a trainer ratio. cannery share was formulated by jack Charles Tina and does it is named after him. trainer ratio is also known as reward to volatility ratio. So, in other words it is the ratio between reward that is returned from a mutual fund and the volatility volatility we can measure through beta it is a measure of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk. Now, we know that the investment which has no diversifiable risk our investments like investment in government bonds or in fixed deposits etc. So, these have no diversifiable risk or in other words we can say investment in investments that have no diversifiable risk is the same as the risk free rate.
In layman's terms, higher the trainer ratio, we can expect better performance from the portfolio So, the formula for treynor ratio is returned from the asset minus risk free rate divided by the beta of the asset that is RM minus RF divided by beta. We will see an example of how to calculate the treynor ratio. By now you're familiar with this Excel sheet. So, the first column A we have the dates on the second column, we have Sensex then we have nav, then we have calculated the returns, then we have calculated returns from the market return from the asset and return from the risk free and the risk free rate and we also calculated the beta. Now we will calculate the treynor ratio. So I just expand make it bigger.
So we say treynor ratio. Now like we have seen in the formula, it is ra minus RF divided by beta. So we'll put the formula ra minus RF by beta there we get the treynor ratio. turnover ratio is generally used for ranking of mutual funds, it is very useful for ranking mutual funds. However, it has to see we have limitations, one is not he only considers the systematic risk, this should be clear from the formula of credit ratio. However, like we saw in the Sharpe ratio, it considers systematic risks as well as unsystematic risk.
However, Turner ratio only considers systematic risks. So, if two portfolios are the same systematic risk, but have to have different total this current ratio will rank both of them the same. Second limitation is that in addition does not quantify the value added. So, this is because of this limitation translations only used for evaluating our support from To have our fully diversified, broader portfolio. Thank you for listening. See you in the next lecture.