The Treynor ratio, also known as the reward-to-volatility ratio, is a metric for returns that exceed those of a risk-free investment, per each unit of market risk. The Treynor ratio, invented by Jack Treynor, is calculated as:
(Average Return of a Portfolio – Average Return of the Risk-Free Rate)/Beta of the Portfolio
The Treynor ratio is similar to the Sharpe ratio. The difference between the two metrics is that the Treynor ratio utilizes beta, or market risk, to measure volatility instead of using total risk (standard deviation).