Which ratio measures the expected excess return earned per unit of systematic risk?

The Treynor Ratio specifically measures the expected excess return earned per unit of systematic risk, which is quantified by beta. This ratio focuses on the return generated in excess of the risk-free rate relative to the systematic risk of the investment, making it a valuable tool for assessing the performance of an investment or a portfolio in relation to market risk. It is particularly beneficial for investors who are looking to understand how much return they are gaining for the risk taken relative to the market.

The formulation of the Treynor Ratio is:

[ \text{Treynor Ratio} = \frac{R_p - R_f}{\beta_p} ]

where ( R_p ) is the return of the portfolio, ( R_f ) is the risk-free rate, and ( \beta_p ) is the portfolio's beta.

In contrast, the Sharpe Ratio measures risk-adjusted return based on total risk (both systematic and unsystematic), which is not solely focused on systematic risk. The Alpha Ratio assesses the performance of an investment relative to a benchmark, but it does not provide a direct measure of excess return per unit of systematic risk. The Sortino Ratio also addresses downside risk rather than strictly systematic risk, focusing on negative volatility rather than