The Sharpe ratio is a measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a trading strategy. The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken. When comparing two assets each with the expected return against the same benchmark, the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios.
Sharpe ratios, along with Treynor ratio and Jensen’s Alpha, are often used to rank the performance of portfolio or mutual fund managers.
This ratio was developed by William Forsyth Sharpe in 1966. Sharpe originally called it the "reward-to-variability" ratio in before it began being called the Sharpe Ratio by later academics and financial professionals. Recently, the (original) Sharpe ratio has often been challenged with regard to its appropriateness as a fund performance measure during evaluation periods of declining markets (Scholz 2007).
Suppose the asset has an expected return of 15% in excess of the risk free rate. We typically do not know the asset will have this return; suppose we assess the risk of the asset, defined as standard deviation of the asset's excess return, as 10%. The risk-free return is constant. Then the Sharpe ratio (using a new definition) will be 1.5 (R= 0.15and ? = 0.10).
As a guide post, one could substitute in the longer term return of the S&P500 as 10%. Assume the risk-free return is 3.5%. And the average standard deviation of the S&P500 is about ±16%. Doing the math, we get that the average, long-term Sharpe ratio of the US market is about 0.40625 ((10%-3.5%)/16%). But we should note that if one were to calculate the ratio over, for example, three-year rolling periods, then the Sharpe ratio would vary dramatically
Calculation:
rs = Realized return
rrf = Risk-free rate of return
StdDev = Standard Deviation indicator value
Giriþ Paaarametreleri:
Security = XU030
Reference Security = XU100
Indicates risk-free asset.
Start Day = First day of the date range
End Day = Last day of the date range
Currency
Indicator Type: Relation