How is the Treynor Ratio calculated?

The Treynor Ratio is a measure of risk-adjusted return that assesses how much excess return is generated for each unit of risk taken, as represented by beta. It is calculated by taking the difference between the return of the portfolio and the risk-free rate, and then dividing that figure by the portfolio's beta.

This approach allows investors to evaluate the performance of a portfolio in relation to the systematic risk associated with it. By focusing on the excess return over the risk-free rate, the Treynor Ratio indicates how effectively a portfolio is compensating investors for taking on additional risk. A higher Treynor Ratio implies a more attractive risk-adjusted return, guiding investors in making comparisons between different portfolios or investment strategies.

In this context, utilizing beta as the denominator is crucial, as it reflects the portfolio's sensitivity to market movements. Thus, the calculation accurately measures the performance adjusted for market risk, making it a valuable tool in portfolio management.