It is similar to Sharpe Ratio except that it uses beta instead of standard deviation. It’s also known as Reward to Volatility Ratio. It is the ratio of a fund’s average excess return to the fund’s beta. Treynor ratio evaluates the performance of a portfolio based on the systematic risk of a fund. Treynor ratio is based on the premise that unsystematic or specific risk can be diversified and hence, only incorporates the systematic risk (beta) to gauge the portfolio’s performance. It measures the returns earned in excess of those that could have been earned on a riskless investment per unit of market risk assumed. The formula is typically used in ranking Mutual Funds with similar objectives.
The absolute risk adjusted return is the Treynor plus the risk free rate.