Report
Report
Report
The Treynor-Black model was published in 1973 by economists Jack Treynor and
Fischer Black. Treynor and Black assumed that the market is highly but not
perfectly efficient. Following their model, an investor who largely agrees with the
market pricing of an asset may also believe that they have additional information that
can be used to generate excess returns—known as alpha—from a select few
mispriced securities.
The investor using the Treynor-Black model will thus select a small mix of
underpriced securities to create a dual-partitioned portfolio, based on their own
research and insight. One portion of the portfolio follows a passive index investment,
and the other part an active investment in those mispriced securities.
The Sharpe Ratio Formula offers a simple method to help investors make these
calculations. The formula looks like this:
Where:
The risk-free investment is the UK Treasury Bill which has an interest rate of
0.3%.
The so-called "real" risk-free rate can be calculated by subtracting the current
inflation rate from the yield of the Treasury bond matching your investment duration.
Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation
Rate)-1
The various applications of the risk-free rate use the cash flows in real terms. Hence, the risk-free
rate must also be brought to the same real terms, which is inflation-adjusted for the economy.
Since the rate is mostly the long-term government bonds – they are adjusted to the rate of
inflation factor and provided for further use.
If the period is up to 1 year, one should use the most comparable government security, which is
the Treasury Bills
, or simply the T-Bills
If the period is between 1 year to 10 years, one should use a Treasure Note.
If the period is more than ten years, one can consider selecting Treasure Bond.
Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation
Rate)-1
Use the following data for the calculation of the risk-free rate of
return.
=(1+3.25%)/(1+0.90%)-1
Risk-free Rate of Return = 2.33%
Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.
Alternative Proxies: