What is the Treynor Ratio?
The Treynor Ratio, developed by Jack Treynor, measures how much excess return a fund earned per unit of systematic (market) risk. Instead of using total standard deviation like the Sharpe Ratio, it uses Beta — which represents only the market-related portion of a fund's risk.
The underlying logic: if you hold a diversified portfolio of funds, the individual stock-specific risks cancel out across your holdings. The only risk that remains and cannot be diversified away is market risk (Beta). So Treynor Ratio measures what matters to a diversified investor.
Treynor vs Sharpe — When to Use Which
| Scenario | Use Sharpe | Use Treynor |
|---|---|---|
| Single fund evaluation | ✓ Preferred | — |
| One fund in a diversified portfolio | — | ✓ More relevant |
| Fund has low R² vs benchmark | ✓ More reliable | Unreliable |
| Comparing funds with very different Beta | — | ✓ Normalises for Beta |
Comparing Nippon vs SBI via Treynor
Nippon India Small Cap has a higher Beta (~1.05) and higher raw return (~32%). SBI Small Cap has lower Beta (~0.88) and lower raw return (~28%). Assuming risk-free rate of 6.5%, Nippon's Treynor = (32−6.5)/1.05 = 24.3. SBI's Treynor = (28−6.5)/0.88 = 24.4. Almost identical — meaning both funds reward systematic risk equally. The choice then comes down to your Beta preference: do you want a smoother ride (SBI) or a bigger swing (Nippon)?