You subtract the risk-free rate from your portfolio return. Then, you divide that result by the portfolio’s beta. The final number shows how much return you get for each unit of market risk. The key difference between the Treynor Ratio and the Sharpe Ratio lies in the type of risk they consider. By focusing on systematic risk, it provides clear insights into whether a portfolio is delivering adequate returns for the level of market risk it carries. The fact sheet has information about various types of risks.

Ratios greater than 0.5 are often seen as strong, while those closer to 1.0 suggest exceptional performance in relation to risk. The Treynor ratio is a risk-adjusted metric that evaluates portfolio performance in relation to systematic risk, also called market risk. Named after American economist Jack Treynor, this ratio is calculated by dividing the excess return of a portfolio over the risk-free rate by its beta. In essence, the Treynor ratio is a risk-adjusted measurement of return based on systematic risk.

Create a free account to unlock this Template

• This is exactly where the analysis of a good Treynor ratio and Sharpe ratio comes into the picture.
• This is not an offer to buy or sell any security or interest.
• There is a possibility that you may sustain a loss equal to or greater than your entire investment.
• It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance.

It shows how much excess return you get for each metatrader expert advisors unit of market exposure. Assume that total return on the equity portfolio and fixed income portfolio is 8% and 6% respectively. Moreover, we assume that the beta on the equity portfolio and fixed income portfolio is 1.40 and 0.8 respectively. Using this information, we compute the Treynor ratio for both portfolios. A good Treynor ratio typically reflects a higher return relative to the portfolio’s exposure to market risk. In general, a positive Treynor ratio indicates that a portfolio is earning more than the risk-free rate per unit of market risk, which is considered favorable.

Beta as a Risk Measure

Regular monitoring can help track performance changes and make necessary adjustments based on market conditions. While the Treynor Ratio is invaluable for assessing risk-adjusted returns, it’s crucial to acknowledge its limitations. Conversely, a low or falling Treynor Ratio may signal the need to adjust the portfolio by diversifying or reducing risk exposure. This could indicate that the portfolio is underperforming or that it is exposed to unnecessary risk without adequate returns. This article will break down the Treynor Ratio, showing you how to compute it, apply it in real-world scenarios, and understand what the results mean for your investments. Suppose an investment firm’s portfolio has averaged a return of 8.0% over the trailing five years.

They communicate their performances through a document called the fact sheet. This analysis is also conducted by external companies to show investors the best funds to invest in, sector-wise. The higher the Treynor ratio of a portfolio, the better its performance.

Copyright: © 2025 Volity Trade Ltd. All Rights reserved.

This formula reflects that the Treynor ratio is concerned with both portfolio return and its systematic risk, and shows excess returns per unit of systematic risk. The higher the Treynor ratio, the better the risk-adjusted return i.e. a higher return per unit of systematic risk and consequently a better performance of the portfolio manager. The Treynor ratio is most effective when evaluating a well-diversified portfolio that is primarily exposed to systematic risk. In these cases, unsystematic risks, like company-specific or sector-specific volatility, are assumed to be minimized or eliminated. The Treynor ratio helps investors assess how well the portfolio compensates for market risk alone, making it useful for portfolios driven by their beta, or sensitivity to broader market trends.

• From a purely mathematical perspective, the formula represents the amount of excess return from the risk-free rate per unit of systematic risk.
• Assume that total return on the equity portfolio and fixed income portfolio is 8% and 6% respectively.
• Treynor ratio calculation is done by considering the beta of an investment to be its risk.
• The Treynor ratio is a risk-adjusted metric that evaluates portfolio performance in relation to systematic risk, also called market risk.
• A negative ratio is often a sign of poor performance.
• The Treynor Ratio is a performance metric used to evaluate the risk-adjusted returns of an investment portfolio.

What is the Treynor Ratio?

But from the Treynor ratio calculation, we have understood that Investment B is the best among the three. In contrast, despite having the highest percentage, Investment C is the worst-performing investment among the three. This difference in the results came because of the use of the measure of the risk in the Treynor ratio calculation.

Strategic Portfolio Adjustments

You use the Treynor Ratio if you manage a benchmarked fund or a market-based strategy. You use the Sharpe Ratio if you invest in single stocks, mixed assets, or non-diversified funds. That means your portfolio underperforms even a risk-free asset.

Are you comparing managers or funds that track the same benchmark? Because the raw return doesn’t tell the full story. But you can see a portfolio might earn more but also carry more risk.

After many years in the financial markets, he now prefers to share his knowledge with future traders and explain this excellent business to them. The Treynor Ratio is a valuable tool for investors looking to understand and optimize their risk-adjusted returns. Regular assessment can help investors recognize trends, such as a decreasing Treynor Ratio, which might indicate increasing risk or diminishing returns.

The Treynor Ratio is a portfolio performance measure that adjusts for systematic risk. In contrast to the Sharpe Ratio, which adjusts return with the standard deviation of the portfolio, the Treynor Ratio uses the Portfolio Beta, which is a measure of systematic risk. A Treynor Ratio of 0.5 means the portfolio earns 0.5 units of excess return for each unit of market risk. For example, it could mean a 5% excess return for a beta of 1.0. Treynor gives you useful insight but only part of the picture. It also doesn’t show volatility or downside movements.

Instead of that, systematic risk is considered. The understanding of the formula shall give us a clear understanding of the concept and its related factors and shall help us identify a good Treynor ratio as well. If you want to build an investment portfolio, a financial advisor can help you analyze and manage investments. The Equity Portfolio’s total return is 7%, and the Fixed Income Portfolio’s total return is 5%. As a proxy for the risk-free rate, we use the return on U.S Treasury Bills – 2%.

The β value can be measured, keeping the value of 1 as a benchmark. The β value for the whole market is taken equal to 1. A portfolio with a high number of volatile stocks will have a beta value greater than 1. On the other hand, if an investment has only a few volatile stocks, the β value of that investment will be less than one, indicating a negative Treynor ratio.

The primary difference is the risk measure used. The Treynor ratio uses systematic risk (beta) in its denominator, while the Sharpe ratio uses total risk (standard deviation), making Treynor better for diversified portfolios. You now understand what the Treynor Ratio measures. It shows how much excess return you earn for every unit of market risk.

It indicates that a portfolio is generating more return for each unit of market risk it has assumed, suggesting a more efficient investment. The Fixed Income portfolio has a higher Treynor ratio, which suggests that this portfolio has a more favorable risk/return mix than the fixed income portfolio. Therefore, it is advisable for an investor to invest in the Fixed Income portfolio. Given below are two portfolios, and we use the Treynor Ratio to decide which portfolio is a better investment.