DEFINITION of Treynor Index
The Treynor Index measures the risk-adjusted performance of an investment portfolio by analyzing a portfolio's excess return per unit of risk. The measure of market risk used is beta, which is a measure of overall market risk or systematic risk. The higher the Treynor Index, the greater "excess return" being generated by the portfolio per each unit of overall market risk. The index was developed by economist Jack Treynor. It is essentially an expression that represents how many units of reward an investor is given for each unit of volatility, or pain, they experience along the ride.
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.
Example of the Treynor Index
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.