Definition – What is the Treynor Ratio?
The Treynor Ratio is the average return above the risk-free rate of return on an investment. The risk free rate of return can be an investment such as a U.S. Treasury investment or a diversified portfolio.
A high treynor ratio means that the investment is making a lot of money above the risk-free rate of return.
A low treynor ratio means that the investment is making only a little money above the risk-free rate of return.
A negative treynor ratio means that the investment is making less money than risk-free investment such as a US Treasury or diversified investment.
Formula – How to calculate the Treynor Ratio
Treynor Ratio = (Portfolio’s Return – Risk Free Rate) / Portfolio Beta
A portfolio has a return of 4.55%. The risk free rate is 1.75%. The portfolio Beta is 0.60.
Treynor Ratio = (0.0455 – 0.0175) / 0.60 = 0.028 / 0.60 = 0.0467
Therefore, this portfolio’s Treynor Ratio is 0.0467 or 4.67%
Sources and more resources
- Forbes – How to get a Treynor Ratio – A summary of the Treynor Ratio.
- Motley Fool – Use the Treynor Ratio to Measure Your Risk-Adjusted Portfolio Performance – A quick explanation of Treynor Ratio.
- Wikipedia – Treynor Ratio – Wikipedia’s entry on Treynor Ratio, as well as a quick explanation and limitations of the metric.
- Investopedia – Treynor Ratio – A break down and limitations of the Treynor Ratio.