The Treynor Ratio is a risk-adjusted performance metric that measures the return earned per unit of systematic risk (Beta) taken, rather than per unit of total risk (standard deviation) as the Sharpe Ratio does. It is calculated as: Treynor Ratio = (Portfolio Return – Risk-Free Rate) ÷ Portfolio Beta. A higher Treynor Ratio indicates better return per unit of market risk. The Treynor Ratio is most appropriate for evaluating well-diversified portfolios where idiosyncratic (stock-specific) risk has largely been eliminated making Beta the relevant risk measure. For concentrated portfolios or individual stock analysis, the Sharpe Ratio (which uses total volatility) is more appropriate. In India, the Treynor Ratio is used by analysts and institutional investors to compare equity funds that maintain different levels of market exposure.
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