Treynor ratio

What it means

Excess return per unit of systematic risk, using beta in the denominator.

The exam angle

The right measure when the portfolio is one component of a diversified whole, where only its beta matters.

Where it appears in the syllabus

• Portfolio ConstructionCFA Level I · exam weight 8–12% · Risk and return, the CAPM, IPS construction, behavioural biases.
• Performance MeasurementCFA Level III · exam weight 5–10% · Attribution, appraisal, manager selection and the GIPS standards.

Related terms

• AlphaReturn in excess of what the asset’s risk exposures would predict.
• Information ratioActive return divided by tracking error — value added per unit of benchmark-relative risk.
• Sharpe ratioExcess return over the risk-free rate, per unit of total risk.
• Behavioural biasA systematic departure from rational decision-making, either cognitive — an error of reasoning that education can…
• BetaThe sensitivity of an asset’s return to the market’s return — its share of systematic risk.
• Capital allocation lineThe set of risk–return combinations available by mixing a risky portfolio with the risk-free asset.