Treynor Ratio

The Treynor Ratio is a performance metric used to evaluate the risk-adjusted returns of an investment portfolio or individual asset. It is calculated by dividing the portfolio’s excess return (return above the risk-free rate) by its beta (a measure of market risk). The Treynor Ratio helps investors understand how much return they are earning for each unit of market risk they are taking. A higher Treynor Ratio indicates better risk-adjusted performance.

Example

An investor compares two portfolios with the same return but different betas. The portfolio with a lower beta and higher Treynor Ratio is considered more efficient, as it offers more return per unit of market risk.