Treynor ratio

The Treynor ratio is a financial metric used to evaluate the performance of an investment portfolio by comparing excess returns to the systematic risk taken. Systematic risk refers to the market-wide risk that cannot be eliminated through diversification. This ratio helps investors understand how much excess return they are earning for each unit of systematic risk they are assuming.

The Treynor ratio is calculated by taking the difference between the portfolio's return and the risk-free rate, then dividing that by the portfolio's beta (a measure of systematic risk). A higher Treynor ratio indicates better performance, as it means the portfolio is generating more excess return for each unit of systematic risk compared to other investments.