Treynor Ratio

The Treynor ratio measures return per unit of market risk (beta), for diversified portfolios.

Common mix-ups

It ignores non-market risk, so it suits broad portfolios, not single stocks.

Picture this

Two index funds in the same category: one has a beta of 1.3 and returns 14%, the other a beta of 0.8 and returns 10%. The first looks like the better performer, but its Treynor is (14 − 2) ÷ 1.3 = 9.2 versus (10 − 2) ÷ 0.8 = 10.0 — the calmer fund delivers more return per unit of market risk it takes. The scenario is why Treynor exists: raw returns reward the risk-taker, while the ratio rewards the fund that earns its return efficiently.

How to apply it

Use Treynor to compare diversified funds that share the same mandate. For single stocks or concentrated portfolios, Sharpe or Sortino, which count total risk, are more honest.

What it means for you

It rewards market-risk efficiency, best for already-diversified funds.

A quick example

Key takeaway

The Treynor ratio scores return per unit of market risk — beta — and it is the right tool for comparing diversified funds that share a mandate. Because it assumes company-specific risk is diversified away, it is the honest scorecard for broad portfolios and the wrong one for single stocks. A fund with lower raw returns can beat on Treynor by earning them with less market risk. Use it to reward efficiency, not just raw performance. When you compare two index funds in the same category, Treynor tells you which one delivers more return for the market risk it actually takes.

Definitions reviewed by the Investing Glossary editorial team.