How this number is made
The Treynor ratio uses beta instead of total volatility. It only makes sense if the risk you care about is market risk, and the rest was diversified away. A concentrated book can look fine here and still blow up.
- Beta is against the same market you have in mind for the risk-free comparison.
- A beta near zero makes the ratio huge or meaningless. Read the note if that happens.
Formula
Treynor = (portfolio return − risk-free rate) ÷ beta.
Worked example
With the figures already in the form, extra return per unit of beta is 4.17%.
Questions
Why is the result a percent?
It is extra return per unit of beta. A result of 4% means four percentage points of extra return for a beta of 1.
When should I use Sharpe instead?
When the portfolio is not diversified. Sharpe counts risk the Treynor ratio ignores.