Treynor Ratio

See: Treynor Index.

We all wanna get the most bang for our buck, especially when it comes to our portfolios. Risk is necessary for the chance at having great returns, but it doesn’t guarantee them.

The Treynor ratio, a.k.a. the reward-to-volatility ratio, measures your portfolio performance in terms of how much return you’ve gotten per unit of risk taken.

We can thank American economist Jack Treynor for this one. He also helped to create the Capital Asset Pricing Model (CAPM)...so he’s a bfd.

Ideally, you’d be seeing excess returns per unit of risk. But how do you measure risk? Risk in the Treynor ratio uses a portfolio’s beta, which is basically a best-fit regression line of market returns to individual returns...a standard measure of volatility in technical portfolio analysis. The Treynor ratio is simple, but effective: subtract your risk-free rate from your portfolio return, and divide that number by your portfolio’s beta. Beta-bing, beta-boom: you’ve got a risk-adjustment measurement of your returns. The higher the ratio, the better.