Treynor Ratio
Updated 2026-08-13
INTRODUCTION
English translation pending.
CORE DEFINITION
Developed by Jack Treynor, the ratio equals the portfolio return minus the risk-free rate, divided by the portfolio's beta. It measures excess return earned per unit of systematic, non-diversifiable risk. The qualification is that it prices only market risk, so a portfolio carrying heavy idiosyncratic risk is not penalized, which distinguishes it from the Sharpe ratio and its division by total volatility. It is most informative when comparing well-diversified portfolios, since diversification is the assumption that makes beta the relevant risk measure.
SCAFFOLDING EFFECT
Reduce cognitive load
- Performance comparison: rank portfolios by excess return per unit of beta rather than by raw return. - Diversification check: use the ratio only when the portfolios compared are already well diversified. - Risk attribution: ask how much of a return comes from market exposure rather than from skill.
Anchor fast decisions
Investors can hold the market index cheaply, so they should be paid only for risk that cannot be diversified away. Beta measures that irreducible exposure. Dividing excess return by beta therefore converts raw performance into a price per unit of unavoidable risk, which allows portfolios with different market exposures to be compared on the same footing.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Treynor_ratioverified
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