# Treynor Ratio > The Treynor ratio divides excess return by beta to measure reward for market risk. Learn the formula, a worked comparison and how it differs from the Sharpe ratio. Source: https://learn.tradelabsai.com/portfolio/treynor-ratio/ Track: Portfolio and Performance · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Treynor Ratio", https://learn.tradelabsai.com/portfolio/treynor-ratio/ The Treynor ratio, named after economist Jack Treynor, measures how much excess return a portfolio earns for each unit of market risk, as measured by beta. Where the Sharpe ratio divides by total volatility, the Treynor ratio divides by beta, which captures only the market related part of risk. The idea is that in a well diversified portfolio, company specific risk has been diversified away, so the only risk that should be rewarded is exposure to the market. ## The formula ``` Treynor ratio = (Portfolio return - Risk free rate) / Beta ``` See [Alpha and Beta](https://learn.tradelabsai.com/portfolio/alpha-and-beta/) for how beta is estimated. **Example: Comparing two funds** Fund A returns 12% with a beta of 1.6. Fund B returns 10% with a beta of 0.8. The risk free rate is 4%. Fund A's Treynor ratio is (12 minus 4) divided by 1.6, or 5.0. Fund B's is (10 minus 4) divided by 0.8, or 7.5. Fund B earns more excess return per unit of market risk. An investor wanting Fund A's market exposure could, in principle, hold Fund B with leverage of 2 times and expect about 4% plus 2 times 6%, or 16%, with the same beta of 1.6, ignoring borrowing costs above the risk free rate. See [Leverage](https://learn.tradelabsai.com/markets/leverage/). ## Treynor versus Sharpe | | Sharpe ratio | Treynor ratio | |---|---|---| | Risk measure | Total volatility | Beta (market risk only) | | Assumes | Nothing about diversification | The portfolio is well diversified | | Best used for | A portfolio that is the investor's whole holding | A portfolio that is part of a larger diversified holding | | Penalises company specific risk | Yes | No | If two funds have the same Treynor ratio but one has much higher volatility, the extra volatility is unrewarded company specific risk. That matters if the fund is all you own, but much less if it sits inside a broad portfolio where such risks cancel out. See [Diversification](https://learn.tradelabsai.com/portfolio/diversification/) and [Sharpe Ratio](https://learn.tradelabsai.com/portfolio/sharpe-ratio/). ## Interpreting values Treynor ratios are expressed in percentage points of excess return per unit of beta. They have no universal good or bad thresholds; compare them across funds over the same period and against the market's own Treynor ratio, which equals the market's excess return because its beta is 1. A portfolio with a Treynor ratio above the market's has delivered more reward for market risk than the market itself. ## Relationship to Jensen's alpha A portfolio with positive Jensen's alpha always has a Treynor ratio higher than the market's excess return, as long as its beta is positive. Both measure performance relative to the CAPM line, but alpha is expressed as a return and Treynor as a ratio. See [Modern Portfolio Theory and the Efficient Frontier](https://learn.tradelabsai.com/portfolio/modern-portfolio-theory/). ## Limitations | Limitation | Explanation | |---|---| | Depends on beta accuracy | Beta estimates vary with the period, frequency and benchmark | | Meaningless for low or negative beta | Dividing by a beta near zero produces huge or misleading values | | Ignores non market risks | Concentrated portfolios look better than they should | | Single factor view | Ignores other factor exposures. See [Factor Models](https://learn.tradelabsai.com/portfolio/factor-models/) | | Backward looking | Past beta and returns may not persist | ## When to use it - **Evaluating funds** that form part of a larger diversified portfolio. - **Comparing equity managers** with similar benchmarks. - **Alongside Sharpe and information ratios,** to see whether a manager's risk is market risk or specific risk. See [Information Ratio and Tracking Error](https://learn.tradelabsai.com/portfolio/information-ratio/). Market neutral and absolute return strategies, with betas near zero, should be evaluated with the Sharpe ratio instead. ## Frequently asked questions ### What is the Treynor ratio? Excess return over the risk free rate divided by beta, measuring the reward earned per unit of market risk. ### How is the Treynor ratio different from the Sharpe ratio? Sharpe divides by total volatility; Treynor divides by beta, ignoring company specific risk that diversification can remove. ### When should I not use the Treynor ratio? For portfolios with beta near zero or negative, such as market neutral funds, where the ratio becomes unstable or meaningless. Next, learn how much of a portfolio's movement a benchmark explains in [R-Squared](https://learn.tradelabsai.com/portfolio/r-squared/). ## Continue learning - Next lesson: [R-Squared](https://learn.tradelabsai.com/portfolio/r-squared/) - Previous lesson: [Information Ratio and Tracking Error](https://learn.tradelabsai.com/portfolio/information-ratio/) - Related: [Information Ratio and Tracking Error](https://learn.tradelabsai.com/portfolio/information-ratio/): The information ratio divides active return by tracking error to measure how consistently a portfolio beats its benchmark. Learn the formulas, values and uses. - Related: [Alpha and Beta](https://learn.tradelabsai.com/portfolio/alpha-and-beta/): Beta measures how much a portfolio moves with the market; alpha is the return beyond what that exposure explains. Learn formulas, CAPM, regression and pitfalls. - Related: [Sharpe Ratio](https://learn.tradelabsai.com/portfolio/sharpe-ratio/): The Sharpe ratio measures return per unit of risk. Learn the formula, how to annualise it, what counts as a good Sharpe ratio, its limitations and common mistakes. - Related: [Diversification](https://learn.tradelabsai.com/portfolio/diversification/): Diversification lowers risk by combining assets that do not move together. Learn the maths, how many holdings you need, its limits in crises and common mistakes. - Related: [Modern Portfolio Theory and the Efficient Frontier](https://learn.tradelabsai.com/portfolio/modern-portfolio-theory/): Modern portfolio theory shows how combining assets can improve return for a given risk. Learn the efficient frontier, minimum variance portfolio and its limits.