What is the Treynor ratio?
It measures an investment portfolio's reward-to-volatility. It uses three different figures in its calculation – the average rate of return, minus the risk-free rate of return, divided by the portfolio’s beta. Beta measures the volatility of an investment relative to a stock index.
Where have you heard about the Treynor ratio?
The ratio was developed by Jack L Treynor, an esteemed American investment professional who helped to create the capital asset pricing model. It enables investors to evaluate how structuring their portfolio to different levels of systematic risk will affect return.
What you need to know about the Treynor ratio.
Imagine a stock portfolio has a 3-year average return of 12%, the 3-year risk-free rate of return is 2% and the portfolio has a 1.5 beta. The portfolio’s Treynor ratio is 6.67. That’s 12-2/1.5. The higher the ratio, the better the performance of the portfolio.
The ratio can provide a good historical indicator when measuring a portfolio’s performance. Like all investment measurement tools, however, the formula is only as good as the information available.
Find out more about the Treynor ratio.
Read our definition of Sharpe ratio, which is similar to the Treynor ratio.