In finance, the Treynor reward-to-volatility model (sometimes called the reward-to-volatility ratio or Treynor measure[1]), named after American economist Jack L. Treynor,[2] is a measurement of the returns earned in excess of that which could have been earned on an investment that has no risk that can be diversified (e.g., Treasury bills or a completely diversified portfolio), per unit of market risk assumed.
The higher the Treynor ratio, the better the performance of the portfolio under analysis.
where: Taking the equation detailed above, let us assume that the expected portfolio return is 20%, the risk free rate is 5%, and the beta of the portfolio is 1.5.
Substituting these values, we get the following Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management.
An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security market line in the capital asset pricing model.