Treynor Index

DEFINITION of 'Treynor Index'

A measure of risk-adjusted performance of an investment portfolio. The Treynor Index measures a portfolio's excess return per unit of risk, using beta as the risk measure; the higher this number, the greater "excess return" being generated by the portfolio. The index was developed by economist Jack Treynor.

Also known as the Treynor Ratio.

BREAKING DOWN 'Treynor Index'

Like the Sharpe ratio - which uses standard deviation rather than beta as the risk measure - the fundamental premise behind the Treynor Index is that investment performance has to be adjusted for risk, in order to convey an accurate picture of performance.

For example, assume Portfolio Manager A achieves a portfolio return of 8% in a given year, when the risk-free rate of return is 5%; the portfolio had a beta of 1.5. In the same year, Portfolio Manager B achieved a portfolio return of 7%, with a portfolio beta of 0.8.

The Treynor Index is therefore 2.0 for A, and 2.5 for B. While Portfolio Manager A exceeded B's performance by a percentage point, Portfolio Manager B actually had the better performance on a risk-adjusted basis.