What does the Treynor Ratio measure in investments?

The Treynor Ratio is a performance metric that assesses how much excess return an investment generates for each unit of risk taken, specifically measuring the return relative to the risk associated with investing in that portfolio or asset, as defined by its beta. Beta quantifies the sensitivity of an investment’s returns in relation to the overall market movements. By using the Treynor Ratio, investors can determine whether they are receiving appropriate compensation for the risk they are undertaking. A higher Treynor Ratio indicates that the investment has produced a better risk-adjusted return, making it a valuable tool for comparing different investments or portfolios in terms of how effectively they achieve returns based on their level of systematic risk.