Enter Values

%
Annualized portfolio return
%
Treasury or T-Bill rate (annualized)
Systematic risk relative to market (β=1 is market average)
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Quick Reference

  • Higher Treynor = Better risk-adjusted returns
  • Uses beta = Best for diversified portfolios
  • All inputs should be annualized
  • Compare portfolios over the same time period

Treynor Ratio Result

Treynor Ratio 6.25% Good
0% 10% 20%+

Formula Breakdown

Treynor Ratio = (Rp − Rf) / β
= (12.00% − 4.50%) / 1.20
= 7.50% / 1.20
= 6.25%

Interpretation

Your portfolio earns 6.25 percentage points of excess return per unit of systematic risk. This is considered good risk-adjusted performance relative to market risk taken.

Rating Guide

These are general guidelines. For meaningful analysis, compare portfolios with similar objectives over the same time period.

< 0% Negative Below risk-free rate
0% - 3% Poor Minimal excess return
3% - 6% Acceptable Reasonable returns
6% - 10% Good Strong performance
10% - 15% Very Good Excellent returns
> 15% Exceptional Verify data accuracy

Understanding the Treynor Ratio

What is the Treynor Ratio?

The Treynor ratio, developed by Jack Treynor (one of the developers of CAPM), measures the excess return per unit of systematic risk. Unlike the Sharpe ratio which uses total risk (standard deviation), the Treynor ratio uses only beta—the measure of systematic, non-diversifiable market risk.

In simple terms, the Treynor ratio answers: "How much excess return am I earning for each unit of market risk I'm exposed to?"

Key Insight: The Treynor ratio is ideal for evaluating well-diversified portfolios. In a diversified portfolio, unsystematic (company-specific) risk is eliminated, leaving only systematic risk—which is exactly what beta measures.

Treynor Ratio vs Sharpe Ratio

Both ratios measure risk-adjusted returns, but they differ in how they define risk:

  • Sharpe Ratio: Uses total risk (standard deviation), which includes both systematic and unsystematic risk. Best for individual securities or undiversified portfolios.
  • Treynor Ratio: Uses systematic risk (beta) only. Best for well-diversified portfolios where unsystematic risk has been eliminated.
When to Use Which: If you're evaluating a single stock or concentrated portfolio, use Sharpe. If you're evaluating a diversified mutual fund that's part of a larger portfolio, use Treynor.

Interpreting the Results

The Treynor ratio represents the percentage points of excess return earned per unit of beta:

  • Higher is better: A portfolio with Treynor = 8% earns more per unit of systematic risk than one with Treynor = 5%
  • Context matters: The market portfolio has a Treynor ratio equal to (Rm - Rf)—the equity risk premium (historically ~5-7%)
  • Compare fairly: Only compare portfolios with similar investment objectives over the same time period

Limitations

While valuable, the Treynor ratio has limitations:

  • Requires accurate beta: Beta estimates vary depending on time period and methodology
  • Assumes diversification: Only meaningful for diversified portfolios
  • Historical data: Beta is backward-looking and may not predict future systematic risk
  • Can't compare negative betas: Results are difficult to interpret when beta is negative

Consider using the Treynor ratio alongside the Sharpe ratio and Beta calculator for a complete picture of risk-adjusted performance.

Frequently Asked Questions

The Treynor ratio measures excess return per unit of systematic risk (beta). Named after Jack Treynor, one of the developers of CAPM, it evaluates how much excess return a portfolio generates for each unit of market risk taken. Unlike the Sharpe ratio which uses total risk (standard deviation), Treynor uses only systematic risk, making it ideal for well-diversified portfolios.

The Treynor ratio formula is: (Portfolio Return − Risk-Free Rate) / Beta. For example, if your portfolio returned 12%, the risk-free rate is 4.5%, and your beta is 1.2, the Treynor ratio is (12% − 4.5%) / 1.2 = 6.25%. This means you earned 6.25 percentage points of excess return per unit of systematic risk.

A higher Treynor ratio indicates better risk-adjusted performance. Generally, a Treynor ratio above 6% suggests good performance, while above 10% is very good. However, these are heuristics based on typical equity risk premiums (5-7%)—always compare portfolios with similar objectives over the same time period rather than using absolute thresholds.

Both measure risk-adjusted returns, but use different risk measures. Sharpe ratio uses total risk (standard deviation), including both systematic and unsystematic risk. Treynor ratio uses systematic risk (beta) only. Use Sharpe for individual securities or undiversified portfolios; use Treynor for well-diversified portfolios where unsystematic risk has been eliminated.

Use Treynor ratio when evaluating well-diversified portfolios where unsystematic risk is negligible—such as mutual funds or ETFs that are part of a larger portfolio. Use Sharpe ratio when evaluating individual securities or concentrated portfolios where total risk (including company-specific risk) matters.

Yes, the Treynor ratio can be negative. This typically occurs when the portfolio return is less than the risk-free rate, indicating negative excess return. A negative Treynor ratio means you would have been better off holding risk-free assets like Treasury bills. Interpretation becomes complex if beta is also negative (rare outside inverse ETFs).
Disclaimer

This calculator is for educational and informational purposes only. The Treynor ratio is a historical measure that uses past data and may not predict future performance. The rating thresholds are general guidelines, not fixed industry standards. Investment decisions should consider multiple factors beyond risk-adjusted returns. Always consult with a qualified financial advisor before making investment decisions.

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