Treynor Ratio

As an investor you must have often read that one of the advantages of a mutual fund is diversification of risk. This makes one feel that mutual fund is a less risky proposition than investing in stocks. But the fact of the matter is that mutual funds are also risky, and even well diversified funds carry risk. Risks are broadly classified into two categories—company risk and market risk. When you invest in a company, you could lose money because that company doesn't do well due to reasons internal to it. Or, you could lose money because the general economic climate worsens and all companies do badly. To illustrate, suppose you have invested in the automobile sector by investing in TELCO. Now if TELCO's cars and trucks do not sell well you are going to lose money. H

This article was originally published on April 16, 2003.