# Treynor Ratio

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## Definition of 'Treynor Ratio'

The Treynor ratio is a measure of the performance of an investment relative to its risk. It is calculated by dividing the excess return of the investment over the risk-free rate by the beta of the investment. The Treynor ratio is named after Jack Treynor, who developed it in 1962.

The Treynor ratio is similar to the Sharpe ratio, but it uses beta instead of standard deviation to measure risk. Beta is a measure of the volatility of an investment relative to the market as a whole. The Treynor ratio is therefore more appropriate for comparing investments that have different levels of risk.

The Treynor ratio can be used to evaluate the performance of a portfolio manager or a mutual fund. A high Treynor ratio indicates that the investment has outperformed the market while taking on the same amount of risk. A low Treynor ratio indicates that the investment has underperformed the market while taking on more risk.

The Treynor ratio is not without its limitations. One limitation is that it does not take into account the time horizon of the investment. Another limitation is that it does not take into account the costs of investing.

Despite its limitations, the Treynor ratio is a useful tool for evaluating the performance of an investment. It can be used to compare investments with different levels of risk and to identify investments that have outperformed the market.

* The Treynor ratio is calculated as follows:

```
Treynor ratio = (R - Rf) / ß

where:

R = return of the investment
Rf = risk-free rate
ß = beta of the investment
```

* The risk-free rate is the return of an investment that is free of risk, such as a U.S. Treasury bond.
* Beta is a measure of the volatility of an investment relative to the market as a whole. A beta of 1 indicates that the investment has the same volatility as the market. A beta of greater than 1 indicates that the investment is more volatile than the market. A beta of less than 1 indicates that the investment is less volatile than the market.
* The Treynor ratio is often used to compare investments with different levels of risk. A high Treynor ratio indicates that the investment has outperformed the market while taking on the same amount of risk. A low Treynor ratio indicates that the investment has underperformed the market while taking on more risk.
* The Treynor ratio is not without its limitations. One limitation is that it does not take into account the time horizon of the investment. Another limitation is that it does not take into account the costs of investing.

Despite its limitations, the Treynor ratio is a useful tool for evaluating the performance of an investment. It can be used to compare investments with different levels of risk and to identify investments that have outperformed the market.

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