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Sharpe ratio explained
- 1. HOME SUBSCRIBE Sharpe Ratio explained 02 DECEMBER 2014 Prerequisite Read the previous article on Expected Return and Risk Sharpe Ratio The Sharpe Ratio is a measure of return and defined as the risk adjusted excess return, but what does this mean ?. Investing in an asset X yields 5% return on investment and investing in asset Y yields 15%, but is the risk factored in ?. How risky is your investment in asset X as opposed to asset Y. The risk could result in a significant loss for a given time window. So the Sharpe ratio can be used to measure the risk adjusted excess return on your investment. The equation Return on Asset X - Risk free return / standard deviation of the return on asset X Risk free return The return on a risk free asset, government bonds for example Return on asset X The return on your risky or not so risk investment in a company Excess return Subtracting the return on Asset X - Risk free return , gives you the excess return on your investment Factoring in risk The standard deviation of the return on asset X is used to factor in risk. Comparing X and Y Sharpe Ratio explained 17/12/2014 http://stock-pulse.com/blog/sharpe-ratio-explained/ 1 / 2
- 2. Therefore it is now possible to compare your investments in asset X with a 5% ROI and asset Y with a 15% ROI if you know the standard deviation of the returns in asset X and asset Y. In other words measure the risk adjusted excess return on investment. pt Read more posts by this author. london http://stock-pulse.com Share this post stock-pulse © 2014 Proudly published with Ghost Sharpe Ratio explained 17/12/2014 http://stock-pulse.com/blog/sharpe-ratio-explained/ 2 / 2