SUBSCRIBE NEWSLETTER
  • Change Language
  • English
  • Hindi
  • Marathi
  • Gujarati
  • Punjabi
  • Tamil
  • Telugu
  • Bengali
  • Tutorials All that you want to know about Sharpe Ratio

    All that you want to know about Sharpe Ratio

    You would have across Sharpe Ratio often in fund fact sheets and in fund analysis stories. Yogita Loke tells you the meaning and significance of this important ratio.
    Yogita Loke Aug 15, 2011

     What is Sharpe Ratio?

    The Sharpe ratio, also known as Reward-to-Volatility-Ratio, measures the risk-adjusted performance. This ratio has been named after William F. Sharpe who developed this ratio. It indicates the excess return per unit of risk associated with the excess return. The higher the Sharpe Ratio, the better the performance.

     

    How it is calculated?

     

    It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

     

    SR = {r - rf} / v

     

    Where

    SR - Sharpe ratio

    R - Portfolio return

    RF – Risk free rate

    V - Portfolio volatility

     

    For example:  Your investor gets 7 per cent return on her investment in a scheme with a standard deviation/volatility of 0.5. We assume risk free rate is 5 per cent.

     

    Sharpe Ratio is 7-5/0.5 = 4 in this case.

    What does Sharpe Ratio signify to the investors?

    The greater a portfolio's Sharpe Ratio, the better its risk-adjusted performance. A negative Sharpe Ratio indicates that a risk-less asset would perform better than the security being analyzed.

     

    Why this ratio is considered important while investing?

     

    This measurement is very useful because it explains why one portfolio has reaped higher returns than its peers; it is only a good investment if those higher returns do not come with too much additional risk.

     

    Risk-adjusted financial performance of investment portfolios or mutual funds is typically measured by Sharpe's ratio. From an investor's point of view, the ratio describes how well the return of an investment compensates the investor for the risk he takes.

    abortion pill nausea read early abortion pill cost
    Have a query or a doubt?
    Need a clarification or more information on an issue?
    Cafemutual welcomes all mutual fund and insurance related questions. So write in to us at newsdesk@cafemutual.com

    Click to clap
    Disclaimer: Cafemutual is an industry platform of mutual fund professionals. Our visitors are requested to maintain the decorum of the platform when expressing their thoughts and commenting on articles. Viewers are advised to refrain from making defamatory allegations against individuals. Those making abusive language or defamatory allegations will be blocked from accessing the web site.
    0 Comment
    Be the first to comment.
    Login or Sign up to post comments.
    More than 2,07,000 of your industry peers are staying on top of their game by receiving daily tips, ideas and articles on growth strategies. Join them and stay updated by subscribing to Cafemutual newsletters.

    Fill in the below details or write to newsdesk@cafemutual.com and subscribe to Cafemutual Newsletter now.