Sharpe Ratio Performance Indicator
Sharpe ratio, also known as Sharp Index, Sharp ratio & Reward-to-Variability ratio, is a popular indicator for measuring return-to-risk. This is a simple ratio developed by 1990 Economics Nobel laureate William F Sharpe which measures the risk adjusted return from a portfolio/asset using just three components: portfolio return, risk-free return like 10-year US Treasury bond return and the standard deviation of portfolio returns.
Sharpe ratio is calculated by subtracting the risk free return from the portfolio return and then dividing the result by the standard deviation.
Where Rp is the portfolio return, Rf is the risk-free return and StdDev is the standard deviation of portfolio return.
Sharpe ratio is a very good indicator of portfolio performance and is widely utilized to compare portfolio performances. The values of the ratio can be positive or negative, where positive values indicate better performance compared to risk-free investments and negative values indicate worse performance than the same. In general, values above 1 are considered good portfolio performance, 2 or above are very good and values above 3 are excellent.
Sharpe ratio reveals whether the excess return from a portfolio is because of smart decision making and investing or just because of taking more risks. For example, if two portfolios generated 12% and 15% returns but the first one took much less risk than the second, then the 12% return can be considered as the better performing portfolio. Some variations of the indicator such as Sortino ratio are also available.
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Sharpe ratio is calculated by subtracting the risk free return from the portfolio return and then dividing the result by the standard deviation.
Sharpe Ratio = (Rp - Rf) / StdDev
Where Rp is the portfolio return, Rf is the risk-free return and StdDev is the standard deviation of portfolio return.
Sharpe ratio is a very good indicator of portfolio performance and is widely utilized to compare portfolio performances. The values of the ratio can be positive or negative, where positive values indicate better performance compared to risk-free investments and negative values indicate worse performance than the same. In general, values above 1 are considered good portfolio performance, 2 or above are very good and values above 3 are excellent.
Sharpe ratio reveals whether the excess return from a portfolio is because of smart decision making and investing or just because of taking more risks. For example, if two portfolios generated 12% and 15% returns but the first one took much less risk than the second, then the 12% return can be considered as the better performing portfolio. Some variations of the indicator such as Sortino ratio are also available.
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by NobleTrading at
9:57 AM
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