2007-07-03 18:37:44 · 3 answers · asked by Syed 1 in Business & Finance ➔ Investing
The sharpe ratio is a risk-adjusted measure of performance, which is often used to evaluate the performance of a portfolio and its manager. The ratio compares the return of the portfolio to the risk-free rate as well as the risk generated by the portfolio.
The focus of this ratio is on the return generated by the portfolio in comparison to the amount of risk taken. The more risk taken, the higher the return should be to compensate for the risk.
It is calculated by taking the return of the portfolio and subtracting the risk-free rate of return. The result is then divided by the standard deviation of the portfolio.
For example, assume that a portfolio returned 10% with a standard deviation of 8%. If the risk-free rate (3-month T-bill) was 4%, the sharpe ratio of the portfolio would be 0.75 [(10%-4%)/8%].
The higher the sharpe ratio, the better the performance of the portfolio is considered to be. If a second portfolio generated the same return (10%) but with a standard deviation of 4%, then the sharpe ratio of the second portfolio would be 1.5, which is considerably better than the first.
The reason that the second portfolio is better, based on the sharpe ratio, is that it generated the same return as the first but with half the risk. That is something that anyone would prefer.
2007-07-04 06:27:58 · answer #1 · answered by Investopedia 3 · 14⤊ 1⤋
Sharpe Ratio Investopedia
2016-11-01 22:09:26 · answer #2 · answered by digman 4 · 0⤊ 0⤋
its the measure of reward to risk
2007-07-03 20:40:28 · answer #3 · answered by Anonymous · 0⤊ 2⤋