TreynorRatio Node
Excess return per unit of systematic risk
Overview
Treynor Ratio measures excess return earned per unit of systematic risk (Beta), not total risk. It's superior to Sharpe Ratio for diversified portfolios where diversifiable risk is eliminated. Treynor > 0.1 is good; Treynor > 0.2 is excellent. It directly answers: "How much excess return per unit of market risk?"
Distinct from Sharpe (which penalizes all volatility), Treynor only penalizes non-diversifiable (systematic) risk. A leveraged but undiversified strategy has high Treynor but risky. A well-diversified strategy with low Beta has lower Treynor but may be superior risk-adjusted.
Formula & Calculation
Beta measures sensitivity to market moves
Treynor = Excess Return / Systematic Risk
Use Sharpe for concentrated bets
Parameters
| Parameter | Default | Description |
|---|---|---|
| period | 252 | Annualization standard |
| benchmark | SPY | Market proxy for Beta |
Common Use Cases
1. Manager Evaluation
Compare diversified portfolio managers: Treynor filters out idiosyncratic risk (luck/skill). High Treynor = true systematic skill.
2. Factor Evaluation
Assess factor premia: If factor Beta is 0.5 and returns 8%, Treynor = 8%/0.5 = 16%. Indicates strong factor premium.
3. Risk-Efficient Ranking
Rank strategies by Treynor: Highest Treynor gets allocated capital. Diversify across high-Treynor strategies for best sharp risk-adjusted returns.
4. Hedge Ratio Optimization
Hedge to maximize portfolio Treynor. If strategy has high Treynor but high Beta, hedge 50% of Beta to improve risk-adjusted returns.
Advantages & Limitations
Advantages
- Focuses on systematic risk
- Best for diversified portfolios
- Penalizes only non-diversifiable
- Industry standard metric
Limitations
- Beta estimation unstable
- Past Beta ≠ future Beta
- Assumes CAPM validity
- Benchmark dependent