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The Treynor ratio measures risk-adjusted return like the Sharpe ratio, but uses beta (systematic/market risk) as its risk measure instead of standard deviation (total risk) — most appropriate for evaluating a single holding within an already well-diversified portfolio, where diversifiable risk has already been mostly eliminated.
How it works
Enter the portfolio's return, the risk-free rate, and its beta, and the calculator applies Treynor Ratio = (Portfolio Return − Risk-Free Rate) ÷ Beta.
- Enter portfolio return (%).
- Enter risk-free rate (%).
- Enter portfolio beta.
- Click Calculate to see your results.
Examples
A solid risk-adjusted return by market-risk measure
A portfolio returning 12% with a 3% risk-free rate and a beta of 1.2 has a Treynor ratio of 7.5 — for each unit of market (systematic) risk exposure, it generated 7.5 percentage points of excess return.
Who should use it
- Evaluating individual holdings within a diversified portfolio.
- Investment analysis and portfolio management.
Industry applications
- Investment analysis and portfolio management
- Fund performance evaluation
Advantages
- Appropriately isolates systematic (market) risk rather than total volatility.
- Well-suited for evaluating individual holdings within a diversified portfolio.
Limitations
- Less meaningful for a standalone, undiversified investment, where diversifiable risk still matters.
Common mistakes to avoid
- Using Treynor ratio for a poorly-diversified individual holding, where diversifiable risk (which Treynor ignores) still matters a great deal.
- Comparing Treynor ratios across investments with unreliable or poorly-estimated beta figures.
Best practices
- Use Treynor specifically for evaluating holdings within an already-diversified portfolio, where Sharpe's total-risk view would be less appropriate.
- Use a beta estimated over a reasonably long, relevant time period for a more reliable result.
Tips
- Use Treynor for individual holdings inside a diversified portfolio, and Sharpe for evaluating a standalone or poorly-diversified investment.