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Sharpe's cousin that measures reward-per-systematic-risk instead of reward-per-total-risk.
Treynor ratio is excess return divided by beta, instead of by standard deviation. It measures how much excess return a portfolio earned per unit of systematic (market) risk, ignoring firm-specific risk that can be diversified away. Best applied to well-diversified portfolios where idiosyncratic risk is already minimal.
Treynor = (Rp − Rf) / βTreynor = (Rp − Rf) / βSame numerator as Sharpe (excess return). Different denominator: beta instead of standard deviation. Beta measures only the market-correlated portion of risk, so Treynor only rewards excess return that came from bearing that systematic component.
The premise: if you are fully diversified, all firm-specific risk has been averaged away. The only risk you can still take is market risk, measured by beta. Treynor asks "how much excess return did you earn per unit of market exposure?"
This works beautifully for diversified portfolios but breaks for concentrated bets. A single-stock portfolio has huge firm-specific risk that Treynor ignores — Sharpe is the correct ratio there.
Your portfolio returned 13%, T-bills paid 4.5%, beta to S&P 500 is 1.2.
Treynor = (13% − 4.5%) / 1.2 = 8.5% / 1.2 = 7.1%
That means you earned 7.1 percentage points of excess return per unit of market beta. Compare to the S&P 500 itself: its Treynor is just its excess return (since its beta is 1 by definition).
Treynor of a diversified portfolio should exceed the benchmark's Treynor (its excess return) to add value. Long-run S&P 500 Treynor is roughly 5–7% per year (its equity risk premium).
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Open the Treynor Ratio Calculator →For well-diversified portfolios where firm-specific risk has been averaged away. For concentrated portfolios or single stocks, Sharpe is the right measure.
Either your excess return was negative (you underperformed T-bills) or your beta was negative (rare — most portfolios are positively correlated with the market).
Regress portfolio returns on benchmark returns. The slope is beta. Foliolytic computes daily beta against S&P 500 for any uploaded portfolio.
Less than 1 year of data is too noisy. 3+ years is the minimum for a stable beta estimate.
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