Treynor Ratio
The Treynor ratio measures excess return per unit of market risk: (portfolio return − risk-free rate) ÷ beta. Unlike the Sharpe ratio, which uses total volatility, it only counts systematic risk, so it suits portfolios that are already diversified.
Two funds both returned 12%. Which did better? It depends on how much risk each took. The Treynor ratio answers that by dividing the return above the risk-free rate by the portfolio's beta — its sensitivity to the market. This entry explains the formula, when to use Treynor instead of Sharpe, and its weak spots.
- Category
- Risk Management
- Reading time
- 3 min
- Also called
- Treynor measure, Treynor index
- Updated
The Treynor ratio in plain words
The Treynor ratio is a performance measure that adjusts return for systematic risk.1
Where the Sharpe ratio divides by standard deviation, the Treynor ratio divides by portfolio beta, a measure of systematic risk.1
Beta is also the risk measure in the CAPM, which sets the return investors need for a given level of market risk.2
How to calculate the Treynor ratio, step by step
Portfolio return
Over a chosen period. See Total Return.
Subtract the risk-free rate
Gives the excess return. See Risk-Free Rate.
Find the beta
Sensitivity to the market. See Beta.
Divide
Excess return ÷ beta.
Compare portfolios
Higher is better, same period and benchmark.
Check diversification
Treynor assumes specific risk is diversified away.
Worked examples
Example 1 — Basic calculation
7.5Portfolio return 12%, risk-free rate 3%, beta 1.2.
| Excess return | 12% − 3% = 9% |
| Treynor ratio | 9 ÷ 1.2 = 7.5 |
The ratio divides the return above the risk-free rate by the portfolio's beta.1
Example 2 — Comparing two funds
A wins on TreynorFund A: 10% return, beta 0.8. Fund B: 13% return, beta 1.5. Risk-free 3%.
| Fund A | (10 − 3) ÷ 0.8 = 8.75 |
| Fund B | (13 − 3) ÷ 1.5 ≈ 6.67 |
Fund B earned more, but Fund A earned more per unit of market risk. See Sharpe Ratio.
Example 3 — Low beta, low return
5A defensive fund returns 5% with a beta of 0.4; risk-free 3%.
| Treynor ratio | (5 − 3) ÷ 0.4 = 5 |
A small excess return can still look respectable when market risk is very low. See Cyclical and Defensive Stocks.
Treynor vs Sharpe ratio
| Aspect | Treynor | Sharpe |
|---|---|---|
| Risk measure | Beta (systematic) | Standard deviation (total) |
| Best for | Diversified portfolios | Any portfolio |
| Ignores | Company-specific risk | Nothing |
| See also | Alpha | Sharpe Ratio |
How the Treynor ratio is used
Fund comparison
Ranking diversified funds. See Mutual Fund.
Portfolio components
Judging a holding's contribution to a larger portfolio.
With alpha
Both rely on beta. See Alpha.
Strategy reviews
Checking risk-adjusted performance. See Backtesting.
Advantages and disadvantages
Advantages
- Focuses on risk that can't be diversified away.
- Simple to calculate.
- Useful for comparing diversified portfolios.
Disadvantages
- Misleading for concentrated portfolios.
- Depends on the benchmark used for beta.
- Breaks down when beta is near zero or negative.
Going deeper
Read as far as you need. Each level builds on the one before it.
Named after a CAPM pioneer
Beginner
The ratio is named after Jack Treynor, one of the developers of the Capital Asset Pricing Model.1 See Capital Asset Pricing Model.
Return over risk
Intermediate
Like the Sharpe ratio, it is a quotient of return divided by risk; the difference is which risk is used.1
Beta comes from CAPM
Advanced
In CAPM, the risk premium is scaled by beta and added to the risk-free rate; Treynor reverses that idea to measure reward per unit of beta.2
Common mistakes
Using it on one stock
Specific risk is ignored.
Wrong benchmark
Beta must match the market used.
Negative beta
The ratio becomes meaningless.
Mixing periods
Compare the same time window.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Treynor = (return − risk-free rate) ÷ beta.
- It measures reward per unit of market risk.
- It suits well-diversified portfolios.
- Sharpe uses total volatility instead.
- Beta near zero makes it unreliable.
Frequently asked questions
What is a good Treynor ratio?
When should I use Treynor instead of Sharpe?
Can the Treynor ratio be negative?
Further learning
- Sharpe Ratio
The total-risk version.
- Beta
The risk measure used.
- Capital Asset Pricing Model
Where beta comes from.
- Alpha
Another beta-based measure.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Treynor Ratio (opens in a new tab) Checked .
- Corporate Finance Institute. Alpha (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Treynor Ratio (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.