Sharpe Ratio (Reward-to-Volatility)

3Mar 0

Sharpe Ratio (Reward-to-Volatility)

Last Updated on 2023-12-11 by Admin

Notes

Measures return per unit of risk.
The higher the Sharpe Ratio the better the investment.
Is the slope of the Capital Allocation Line (CAL).
Excess return above the risk-free rate (risk premium).
Commonly used to evaluate Fund Managers performance.

Formula

$$\begin{aligned} Sharpe\;Ratio &= \left[ Expected\;Return\;-\;Risk\;Free\;Rate\over Standard\;Deviation\;of\;Excess\;Return \right] \\\\\\\ &= \left[ Risk\;Premium\over Standard\;Deviation\;of\;Excess\;Return \right] \\\\\\\ &= \left [E(r_i)\;-\;r_f \over \sigma_i \right]\end{aligned}$$

Graph

Sharpe Ratio

Expected Return (%):

(i.e. An expected return of 8.4% or 0.084)

Risk Free Rate (%):

(i.e. A risk free rate of 3.6% or 0.036)

Standard Deviation of Excess Return (%):

(i.e. A standard deviation of excess return of 21.2% or 0.212)

Sharpe Ratio:

Sharpe Ratio

Risk Premium (%):

Standard Deviation of Excess Return (%):

Sharpe Ratio:

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Financial Analysis