What is the primary purpose of the Treynor Ratio?

The primary purpose of the Treynor Ratio is to measure excess return per unit of market risk. Developed by Jack Treynor, this ratio specifically focuses on how much additional return an investment is generating for each unit of systemic risk, which is represented by beta. Unlike other performance ratios that may consider total risk (like the Sharpe ratio), the Treynor Ratio isolates market risk, making it particularly useful for investors who have well-diversified portfolios and want to understand the reward for taking on that non-diversifiable risk.

This ratio is calculated by taking the difference between the portfolio's return and the risk-free rate and dividing it by the portfolio's beta. A higher Treynor Ratio indicates that the investment has provided a better return for the risk taken in relation to market fluctuations, allowing investors to compare different investments or portfolios on a risk-adjusted basis in the context of market exposure.

The other options focus on different aspects of investment evaluation. For instance, measuring average excess return per unit of total risk reflects a broader view of risk that encompasses all risk types, not just market risk. Evaluating performance related to a benchmark is more general and can include various metrics, while computing risk-adjusted returns can refer to any method that adjusts for