The Treynor Ratio measures return earned per unit of market risk (Beta) — useful for evaluating diversified portfolios where systematic risk is the primary concern.
The Treynor Ratio = (Portfolio Return − Risk-Free Rate) ÷ Beta. It measures how much excess return a fund generates for each unit of systematic (market) risk it takes on. Unlike the Sharpe Ratio (which uses total volatility as the risk measure), Treynor uses Beta — which captures only the portion of risk that cannot be diversified away (market risk). For well-diversified portfolios where idiosyncratic stock risk has been eliminated, Treynor is more appropriate than Sharpe.
Beta tells you how much a fund moves relative to the overall market. The Treynor Ratio asks: 'For every unit of market sensitivity (beta) you added, how much extra return did you get?' A fund with 15% return and beta of 1.2 has a Treynor of (15−7)÷1.2 = 6.67. A fund with 13% return and beta of 0.8 has a Treynor of (13−7)÷0.8 = 7.5 — better return per unit of market risk. Treynor rewards managers who earn more without taking on excessive market exposure.
Calculate Beta: regression of fund returns against benchmark returns.
Treynor Ratio = (Rp − Rf) ÷ Beta.
Use risk-free rate = 91-day T-bill yield or repo rate.
Compare Treynor Ratios across funds in the same category.
Higher = better risk-adjusted performance relative to market risk taken.
Treynor = (Rp − Rf) ÷ β