What Is Treynor Ratio?
The Treynor Ratio measures excess return (portfolio return minus risk-free rate) per unit of beta (systematic market risk). It's similar to Sharpe but uses beta instead of total standard deviation as the risk measure.
Formula: Treynor = (portfolio return - risk-free rate) / beta. The interpretation: how much excess return are you earning for each unit of market risk you're taking? Higher Treynor means more reward per unit of systematic risk.
Treynor is appropriate when the portfolio is well-diversified (so beta captures most of the risk). For undiversified or single-stock portfolios, Sharpe is better because total risk (idiosyncratic + systematic) matters more. Treynor is most commonly used in institutional portfolio analysis and academic studies.
Related terms
- Sharpe Ratio — Risk-adjusted return — the excess return per unit of volatility.
- Sortino Ratio — Like Sharpe, but only penalizes downside volatility — better for asymmetric strategies.
- Beta — Sensitivity of an asset's returns to overall market returns.
- Alpha — Return earned above a benchmark, adjusted for risk — a measure of skill.