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Treynor ratio

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.

Key points

• Measures risk-adjusted returns based on market risk (beta).

• Calculated by dividing excess return by beta.

• A higher Treynor Ratio indicates better performance relative to market risk.

Quick Answers to Curious Questions

Why is the Treynor Ratio important for evaluating portfolio performance?

It allows investors to compare how efficiently a portfolio is generating returns relative to the level of market risk (beta) it is exposed to.

How does the Treynor Ratio differ from the Sharpe Ratio?

While the Sharpe Ratio measures returns adjusted for total risk (standard deviation), the Treynor Ratio only considers market risk (beta).

What does a negative Treynor Ratio indicate about a portfolio’s performance?

A negative Treynor Ratio suggests that the portfolio's returns have underperformed the risk-free rate relative to its level of market risk.

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