Treynor Ratio.
A definition, in plain English — with the books that teach it.
What it means
The Treynor Ratio measures excess return earned per unit of market risk (beta), rather than per unit of total volatility as the Sharpe Ratio does. It is most appropriate for evaluating a diversified portfolio where unsystematic risk has been largely eliminated, leaving only systematic (market) risk as the relevant dimension. A higher Treynor Ratio indicates a portfolio is generating more return per unit of market exposure.
Example
A fund returned 12% with a beta of 1.2. The risk-free rate was 4%. Treynor Ratio = (12% − 4%) / 1.2 = 6.67. A second fund returned 10% with a beta of 0.8, giving a Treynor of (10% − 4%) / 0.8 = 7.50 — better compensation per unit of market risk despite a lower raw return.
