Investing
Treynor ratio
beta-adjusted return
Treynor ratio in mutual fund performance
The Treynor ratio is a risk-adjusted return measure that computes excess return per unit of systematic risk (beta) , rather than total volatility as in the Sharpe ratio . The Treynor ratio is most meaningful for well-diversified portfolios where unsystematic risk is largely diversified away.
Formula
Treynor ratio = (Scheme return - Risk-free return) / Portfolio beta
Where:
- Portfolio beta: The scheme’s systematic risk relative to the market benchmark.
Interpretation
Higher Treynor ratio = better risk-adjusted return per unit of systematic risk.
Treynor ratio is typically used for:
- Mutual fund comparison with similar diversification levels.
- Active fund evaluation versus passive market exposure.
- Equity-fund evaluation where beta is meaningful.
Sharpe vs Treynor
| Dimension | Sharpe Ratio | Treynor Ratio |
|---|---|---|
| Denominator | Total volatility | Beta (systematic risk) |
| Use case | Concentrated or all portfolios | Well-diversified portfolios |
| Captures unsystematic risk | Yes | No |
For diversified equity mutual funds, Treynor and Sharpe typically rank schemes similarly. For concentrated portfolios, Sharpe is more relevant.
Limitations
- Negative beta: Treynor breaks down for negative-beta or near-zero-beta funds.
- Beta stability: Beta itself can vary across periods.
- Less intuitive: Sharpe is more widely understood.
See also
- Mutual funds in India
- Sharpe ratio
- Sortino ratio
- Alpha mutual fund
- Beta mutual fund
- Information ratio
- R-squared
- Std deviation MF
External references
References
- Treynor, Jack L. “How to Rate Management of Investment Funds.” 1965.
- CFA Institute curriculum.