Treynor Ratio
Treynor Ratio measures risk-adjusted return using systematic risk (beta) rather than total risk: (Return - Risk-Free Rate) / Beta.
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Definition
Treynor Ratio measures risk-adjusted return using systematic risk (beta) rather than total risk: (Return - Risk-Free Rate) / Beta.
Use case
Used in risk management workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Treynor Ratio
While Sharpe uses standard deviation (total risk), Treynor uses beta (market/systematic risk only). It assumes the portfolio is well-diversified, so unsystematic risk has been eliminated. Better for evaluating diversified portfolios; Sharpe better for concentrated holdings. Higher Treynor indicates better compensation per unit of systematic risk.
Example: Portfolio A: Return 15%, Beta 1.2. Treynor = (15% - 5%) / 1.2 = 8.33%. Portfolio B: Return 13%, Beta 0.8. Treynor = (13% - 5%) / 0.8 = 10%. Portfolio B has better systematic risk-adjusted performance despite lower absolute return.