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Treynor ratio, also known as Treynor Index and Reward to Volatility ratio, is used to measure the return for risk taken. The ratio was developed by Jack L. Treynor, hence the name. Treynor ratio is similar to Sharpe ratio; the difference is that it uses the beta or the volatility factor to evaluate the returns rather than the standard deviation of portfolio returns.

Reward to volatility ratio is calculated by subtracting the average risk free portfolio return from the average portfolio return and then dividing the result by beta value of the portfolio.


Where Rp is the portfolio return and Rf is the return from a risk free investment like a US treasury bond.

Treynor ratio is also interpreted like Sharpe ratio; high values mean better return for risk taken or better portfolio performance and lower values mean just the opposite. It should be noted that Treynor ratio measures just the actual returns and does not account for any effect of active portfolio management. The ratio best works for sub-portfolios of a broader diversified portfolio. As the ratio measures the reward against systematic risk, it is not very useful for measuring returns of a less diversified portfolio with high unsystematic risk.

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