Treynor Ratio — Mutual Fund Term Explained

Return per unit of market risk (beta). Like Sharpe but uses beta instead of standard deviation.

The Treynor Ratio measures how much excess return a fund earns per unit of market risk (beta). Unlike the Sharpe Ratio which uses total volatility, Treynor only penalises systematic (market) risk.

Formula

Treynor Ratio = (Fund Return − Risk-Free Rate) ÷ Beta

Related terms

• Sharpe Ratio — Return per unit of total risk taken. Higher is better. Shows how much excess return you earn for each unit of volatility.
• Beta — A measure of a fund's sensitivity to market movements. Beta of 1 moves with the market; >1 means amplified moves; <1 means dampened moves.
• Alpha — The excess return a fund generates over its benchmark. Positive alpha means the manager added value beyond what the market delivered.

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