Treynor Ratio
How well is the fund compensating you for market risk?
What is it?
The Treynor Ratio is similar to the Sharpe Ratio, but instead of dividing by total volatility (standard deviation), it divides by Beta โ the fund's systematic market risk. This makes it more appropriate for comparing well-diversified funds where company-specific risk has been largely eliminated.
A high Treynor Ratio means the fund generates good excess returns for the market risk it carries. A low Treynor means the fund takes on significant market exposure without sufficiently rewarding investors.
Use Treynor when comparing multiple well-diversified equity funds against the same benchmark. For concentrated or sector funds with high unsystematic risk, the Sharpe Ratio is usually more appropriate.
Formula
Treynor Ratio = (Rp โ Rf) รท ฮฒRpFund's annualised returnRfRisk-free rate (โ 6.5%)ฮฒFund's Beta (systematic risk)Real Example
Two equity funds with identical returns but different Betas.
Given
Calculation
Fund A Treynor = (15.0 โ 6.5) รท 0.90 = 8.5 รท 0.90 โ 9.44 Fund B Treynor = (15.0 โ 6.5) รท 1.20 = 8.5 รท 1.20 โ 7.08
What this means
Both funds returned 15%, but Fund A achieved this with lower market risk (Beta 0.90) โ making it more efficient. Its Treynor of 9.44 beats Fund B's 7.08.
Good vs Bad Benchmarks
Above 10
Outstanding return per unit of market risk
7 โ 10
Good compensation for market risk taken
4 โ 7
Adequate but not exceptional market risk efficiency
Below 4
Poor risk-adjusted performance relative to market exposure
Check this ratio for a real fund
MFLens shows Treynor Ratio across 1Y / 3Y / 5Y / 7Y / 10Y rolling windows for every Indian mutual fund.
Rolling metrics on MFLens show how each ratio evolves across all historical windows of the selected period. This provides consistency insights beyond traditional trailing calculations. For informational purposes only โ not financial advice.