Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. As mentioned earlier, the Treynor Ratio assumes that unsystematic risk has been eliminated through diversification. The chart shows that, over the past year, the share basket returned 39.62%. The S&P 500 has a beta of one, since it is a benchmark index often used for calculating beta. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others.

Enhancements to the Treynor Ratio have been proposed to address these limitations, including the Modified Treynor Ratio, Treynor-Black Model, and the incorporation of alternative risk measures. The Treynor Ratio is an invaluable metric for investors seeking to understand the risk-adjusted performance of their portfolios. By focusing on the excess return per unit of market risk, it provides insights into the efficiency of investment decisions. While it has its limitations, when used alongside other performance metrics, the Treynor Ratio can significantly enhance portfolio management and investment strategy. The Treynor Ratio calculates the excess return earned per unit of risk taken by a portfolio. It measures the risk-adjusted return based on the portfolio’s beta, highlighting returns earned in excess of the risk-free rate at a given level of market risk.

The Treynor ratio and Sharpe ratio have many characteristics in common since they both measure risk-adjusted return for portfolio. The only difference between the two is how they measure risk related to the investment. While Treynor ratio uses Beta which is a portfolio return volatility relative to market’s (systematic risk), Sharpe ratio uses the actual portfolio return volatility (total risk).

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But it turned out to offer the best return per unit risk taken as shown by the Treynor Ratio. Jensen’s Alpha is a measure of the risk-adjusted return of an investment portfolio, with a focus on the portfolio’s alpha, or the excess return relative to the expected return based on the portfolio’s beta. The Sharpe Ratio is a similar metric that evaluates the risk-adjusted return of an investment portfolio.

While the Treynor Ratio is a powerful tool for risk assessment, it is not without limitations. It relies on beta as a measure of market risk, which may not fully capture the risk dynamics of all investments, especially those that are not highly correlated with market indices. The best performance indicator measures a portfolio’s returns against a benchmark and the risks. You can use only returns as a performance indicator, but this limits your view because risk is not considered. Ratios that use the beta, the Treynor ratio being one of those, could also be best fitted to compare short-term performance. A higher Treynor Ratio is preferable, indicating better risk-adjusted performance.

Measuring a Portfolio’s Performance

The difference between the two metrics is that the Treynor ratio utilizes beta, or market risk, to measure volatility instead of using total risk (standard deviation) like the Sharpe ratio. Collaborating with experts in the field can provide investors with valuable insights, diversified investment strategies, and ongoing support in navigating complex financial markets. This partnership can help investors make well-informed decisions and optimize their portfolios for long-term success. Moreover, the Treynor Ratio is invaluable for comparing the performance of portfolios with different risk profiles. It helps investors to make informed decisions by highlighting the efficiency of generating excess returns.

1. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.
2. The accuracy of the Treynor ratio is highly dependent on the use of appropriate benchmarks to measure beta.
3. The Treynor Ratio is a ranking device so a portfolio’s Treynor Ratio should be compared to the Treynor Ratio of other portfolios rather than evaluated independently.
4. For investors, the Treynor Ratio serves as a critical tool for portfolio management.
5. Instead, the beta should be measured against an index more representative of the large-cap universe, such as the Russell 1000 index.
6. Hakan Samuelsson and Oddmund Groette are independent full-time traders and investors who together with their team manage this website.

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The numerator identifies excess returns (also called risk premium), and the denominator corresponds to the portfolio’s sensitivity to the overall market’s movements (also called the portfolio’s risk). The beta coefficient is the volatility measure of a stock portfolio to the market itself. It must be noted here that the direct and linear relationship between higher beta and higher long-term returns might not be as robust as it is believed to be. Academics and investors will invariably argue about the most effective strategies for activity risk for years to come. In truth, there may be no measure to be regarded as the perfect measure of risk. It implies that the portfolio has generated higher returns relative to its systematic risk, which is a desirable characteristic for investors.

Traders may wish to consider using the Treynor index as an additional tool when making investment decisions. For short-term trades, Treynor is not particularly useful since it is based on longer-term values which may not apply to trades lasting just a couple of weeks or less. As an example, let’s look at how to calculate the Treynor ratio for a share basket​, such as the ones offered on our Next Generation trading platform. A share basket tracks the movement of many stocks, often belonging to the same sector or industry group.

The risk-free rate typically refers to the yield on government securities, such as How to buy a penguin Treasury bills. For investors, the Treynor Ratio serves as a critical tool for portfolio management. It aids in identifying investments that yield high returns for a given level of market risk. By focusing on systematic risk, it offers a clearer picture of an investment’s performance in relation to the broader market.

In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no atfx broker review responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information.

A higher ratio result is more desirable and means that a given portfolio is likely a more suitable investment. Since the Treynor ratio is based on historical data, however, it’s important to note this does not necessarily indicate future performance, and one ratio should not be the only factor relied upon for investing decisions. Excess return is the return made over and above the risk-free rate of return. The risk-free rate is often considered to be the rate offered on US Treasury Bills, or, you could also think of it as the amount you get in a savings account. If an investment yields 9% in a year, and the risk-free rate for one year is 1%, the excess return is 8%. Generally the little book that still beats the market speaking, the higher the Treynor ratio, the better the investment’s performance.