Treynor Ratio Calculator
Calculate the Treynor ratio to evaluate risk-adjusted returns per unit of systematic risk. Enter portfolio return, risk-free rate, and beta for instant analysis.
About This Calculator
The Treynor ratio, developed by American economist Jack Treynor, measures how much excess return a portfolio generates for each unit of systematic risk it takes. Unlike the Sharpe ratio which uses total risk, the Treynor ratio focuses on market risk (beta) that cannot be diversified away, making it particularly useful for evaluating well-diversified portfolios.
Our calculator computes the Treynor ratio for your portfolio and compares it with common benchmarks to help you evaluate whether your portfolio's returns adequately compensate for the market risk you are taking.
Treynor Ratio Formula:
Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Beta
Treynor Ratio Interpretation:
- Above 10: Excellent risk-adjusted returns relative to market risk
- 5 to 10: Good risk-adjusted returns
- 2 to 5: Fair risk-adjusted returns
- 0 to 2: Poor risk-adjusted returns
- Below 0: Portfolio underperforming risk-free rate
Components Explained:
- Portfolio Return: Annual return of your investment portfolio
- Risk-Free Rate: Return on government securities (10-year bond yield)
- Portfolio Beta: Measure of systematic risk relative to the market
- Excess Return: Portfolio return minus risk-free rate
Treynor Ratio vs. Sharpe Ratio:
- Sharpe Ratio: Uses total risk (standard deviation) - appropriate for undiversified portfolios
- Treynor Ratio: Uses systematic risk (beta) - appropriate for well-diversified portfolios
- Which to use: Treynor for diversified portfolios, Sharpe for total risk assessment
Applications:
- Portfolio Evaluation: Assess how well a portfolio performs relative to market risk
- Fund Manager Comparison: Compare fund managers who take different levels of market risk
- Asset Allocation: Evaluate if the risk-return trade-off is favorable
- Investment Selection: Choose investments with better systematic risk efficiency
Regional Risk-Free Rates:
- India (IN): 10-year G-Sec yield ~6-7%
- United States (US): 10-year Treasury yield ~4-5%
- United Kingdom (UK): 10-year Gilt yield ~3.5-4.5%
Frequently Asked Questions
What is Treynor ratio?
Treynor ratio, also known as Treynor measure, is a risk-adjusted performance metric that measures how much excess return a portfolio generates per unit of systematic risk (beta). It was developed by Jack Treynor and is commonly used to evaluate investment portfolio performance. A higher Treynor ratio indicates better risk-adjusted returns relative to market risk.
How is Treynor ratio calculated?
Treynor Ratio = (Portfolio Return - Risk-Free Rate) ÷ Portfolio Beta. Portfolio return is your investment's annual return. Risk-free rate is typically the 10-year government bond yield. Beta measures the portfolio's sensitivity to market movements. The result tells you how much excess return you earn for each unit of systematic risk taken.
What is the difference between Treynor ratio and Sharpe ratio?
Sharpe ratio uses total risk (standard deviation) as the denominator, while Treynor ratio uses systematic risk (beta) as the denominator. Treynor ratio is considered more theoretically accurate because, according to efficient market theory, investors are only compensated for taking on systematic risk that cannot be diversified away. Sharpe ratio is better for evaluating a portfolio's total risk-adjusted performance.
What is a good Treynor ratio?
Higher Treynor ratios are better as they indicate more return per unit of systematic risk. However, the numerical difference between ratios does not have proportional meaning - a Treynor ratio of 6 is not necessarily twice as good as 3. Generally, a ratio above 5 is considered good, above 10 is excellent. Compare Treynor ratios across similar investment categories for meaningful analysis.
What is beta in the Treynor ratio?
Beta measures a portfolio's sensitivity to market movements. A beta of 1 means the portfolio moves with the market. Beta above 1 indicates higher volatility than the market, while below 1 indicates lower volatility. In the Treynor ratio formula, beta represents the systematic risk that cannot be diversified away and is the denominator that adjusts returns for market risk exposure.
Can the Treynor ratio be negative?
Yes, the Treynor ratio can be negative when a portfolio's return is lower than the risk-free rate. This indicates the investment is not adequately compensating for the systematic risk taken. However, a negative Treynor ratio is rare in well-managed portfolios. It suggests the investor would have been better off investing in risk-free government securities rather than the portfolio.
What is the risk-free rate for Treynor ratio?
The risk-free rate is typically the yield on 10-year government bonds, which varies by country. In India, it is based on 10-year G-Sec yields (around 6-7%). In the US, it uses 10-year Treasury yields (around 4-5%). In the UK, it uses 10-year gilt yields (around 3.5-4.5%). The risk-free rate represents the minimum return an investor expects from any investment.
What are the limitations of Treynor ratio?
The Treynor ratio is a backward-looking metric that depends on historical data and may not predict future performance. It only considers systematic risk and ignores unsystematic risk that may be relevant for undiversified portfolios. The ratio also loses meaning when beta is negative or zero. Additionally, Treynor ratio differences are not proportionally interpretable - a ratio of 6 is not twice as good as 3.