Which formula accurately represents the Treynor Ratio?

The Treynor Ratio is a measure used to assess the risk-adjusted return of a portfolio by comparing the excess return of the portfolio relative to the risk-free rate to the portfolio's systematic risk, which is quantified by beta. The correct formula captures this relationship precisely.

In the accurate representation of the Treynor Ratio, the formula includes the return of the portfolio, subtracts the risk-free rate to focus on the excess return, and divides that figure by the portfolio's beta. This approach provides insight into how much excess return is generated per unit of risk taken, as expressed by beta, which measures the sensitivity of the portfolio's returns to market movements.

This formula is particularly useful for investors who want to understand the trade-off between risk and return in a portfolio context, aiding in the comparisons of different investments or portfolios that have different levels of market risk exposure. It is essential for investors seeking to optimize their portfolios based on performance while accounting for the inherent risk involved.