Treynor ratio
Excess return per unit of market sensitivity: the denominator is beta rather than total dispersion.
Formula
T = \frac{r_p - r_f}{\beta_p}The numerator is the return above the risk-free rate for the period, the denominator the beta against the chosen benchmark. Both are taken from the same window.
How to read the number
It makes sense for a component of a large portfolio: there the holding's own dispersion is partly cancelled by its neighbours, while its market sensitivity stays with it.
When the metric lies
With beta near zero the denominator inflates the result into nonsense; with negative beta the sign flips and the comparison stops working.
Also known as: treynor measure