Financial Analysis – Page 8

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Sharpe Ratio (Reward-to-Volatility)

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 (%):

0

Standard Deviation of Excess Return (%):

0

Sharpe Ratio:

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Protected: Capital Asset Pricing Model (CAPM)

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Financial Analysis

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Capital Adequacy

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Common Equity Tier 1 (CET-1)

Tier 1 (Core) Capital
- - Ordinary Shares
  - General Reserves
  - Current Year’s Earnings
  - Capital Profits Reserve
  - Tier 2 (Supplementary) Capital

Common Equity Tier 2 (CET-2)

Tier 2 (Upper) Capital
- - Perpetual Cumulative Preference Shares
  - Perpetual Cumulative Mandatory Convertible Notes

Tier 2 (Lower) Capital
- - Term Subordinated Debt
  - Limited Life Redeemable Shares

Calculations

Total Risk Weighted Assets (RWA) = Value of Assets x Risk Factor
Min. Common Equity Tier 1 (CET-1) = Total Risk Weighted Assets (RWA) x 4.5%
Min. Tier 1 Capital = Total Risk Weighted Assets (RWA) x 6%
Min. Tier 2 Capital = Total Risk Weighted Assets (RWA) x 2%
Min. Total Capital (Tier 1 + Tier 2) = Total Risk Weighted Assets (RWA) x 8%

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Financial Analysis, Risk & Compliance