Treynor ratio
Certified Financial Planner glossary · Certified Financial Planner
Definition
Excess return per unit of systematic risk; appropriate for well-diversified portfolios.
Treynor ratio in plain English
You are ranking well-diversified portfolios where unsystematic noise has already been mostly washed out. The Treynor ratio measures excess return per unit of systematic risk and is appropriate for those diversified portfolios. Think (return minus risk-free) divided by beta. Using Treynor on a concentrated single-stock sleeve can mislead because beta ignores the idiosyncratic risk that still dominates that sleeve; Sharpe fits the undiversified case better.
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