Definition
The Treynor Ratio measures excess returns earned per unit of systematic (market) risk, using beta rather than standard deviation. It's useful for evaluating portfolios that are part of a larger diversified portfolio, where unsystematic risk is eliminated. Higher ratios indicate better risk-adjusted performance.
Formula
Example
A fund with 12% return, 2% risk-free rate, and 1.2 beta has a Treynor Ratio of 8.33 ((12-2)/1.2).
FAQ
What is Treynor Ratio?
A risk-adjusted measure using beta as the risk metric.
How do you calculate Treynor Ratio?
A common formula for Treynor Ratio is: Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Beta
Why is Treynor Ratio important?
Treynor Ratio helps investors evaluate portfolio management and make more informed decisions.
Related Terms
Sharpe Ratio
Risk-adjusted return measuring excess return per unit of total risk.
Beta
A measure of a stock's volatility relative to the overall market.
Systematic Risk
Market-wide risk that cannot be diversified away, affecting all securities.
CAPM (Capital Asset Pricing Model)
A model that describes the relationship between risk and expected return.