Treynor ratio
Principles of Finance glossary · Principles Of Finance
Definition
Excess return divided by beta.
Treynor ratio in plain English
The Treynor ratio grades an investment on "how much extra reward did you get for the market-risk you took?" The "excess return" is how much you earned above a totally safe investment like a government bond. "Beta" measures how much your investment swings when the overall market swings — a beta of 2 moves twice as hard as the market. Dividing one by the other tells you your reward per unit of that market-wide risk, so a higher Treynor ratio means you were paid better for the bumpiness you couldn't diversify away.
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