Treynor ratio is a measure of returns in excess of that could be obtained in a non-risk investment (like government bonds or US Treasury notes).
Apr 21 2012 10:16 AM
Let me explain - it is generally perceived that bonds issued by financially strong governments such as the US Treasury Bills are virtually risk free since the government only has to print money to reply the loans and hence they can never default.
Now if you are an investor and you invest in anything other than a government bond then there is associated risk with it and you would like to get compensated appropriately. Treynor ratio tells you the how much return more than the government bond did your portfolio make. It is calculated as (Portfolio's Return - Risk Free Return) / Portfolios Beta
Beta indicates the volatility of the portfolio in relation to the local benchmark (which is representative of the overall local financial market).