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Treynor Ratio

In short

Return per unit of systematic (market) risk — uses beta instead of total volatility

Like Sharpe ratio but uses beta (market risk) instead of total volatility. If two portfolios have the same Sharpe but different betas, Treynor reveals which one is more efficient at using market exposure.

Treynor ratio divides excess return by beta. It measures return per unit of systematic risk, excluding unsystematic (diversifiable) risk. Best used to evaluate a portfolio that's part of a larger diversified holding.

Formula

Treynor = (Rp - Rf) ÷ Beta

Related concepts

  • Sharpe Ratio — Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.
  • Beta — Beta of 1.0 means the stock moves in line with the market. Beta of 1.5 means if the market rises 10%, this stock typically rises 15% — more volatile. Beta of 0.5 means less volatile than the market.
  • Alpha — Alpha is the extra return a fund earns above what you'd expect given its risk. If the market returns 10% and your fund returns 13% with the same risk, alpha is 3%. Positive alpha = the manager adds value.
  • Information Ratio — If a manager beats the market by 2% per year on average, but the outperformance swings wildly (+10%, -6%, +2%...), the information ratio is low. Higher IR means consistent, reliable outperformance.