Treynor index 72Advantage over the Jensen index: Treynor index takes the opportunity to lever into account! Given that we can borrow at the risk-free rate we can lever a position in A’ to attain a position at A*. A* has the same beta as B’ but it has a higher expected rate of return.
The fund with the higher Treynor index is considered to be better than the fund with a lower Treynor index.
Treynor index is sensitive to the magnitude of the excess return captured by the manager.
Treynor index is not sensitive to the number of different securities for which a manager captured excess returns.
Single-period random cash flows:
CAPM - Performance measurement