When doing your own investment research one tool that can be very helpful is the Sharpe Ratio. The Sharpe Ratio is named for William Forsyth Sharpe, who developed it in 1966. If the name sounds familiar to you, it could be because Sharpe won the Nobel Prize in Economics in 1990 for his work on the Capital Asset Pricing Model (CAPM).
So what is the Sharpe Ratio and how can it help you? Basically, the Sharpe Ratio is a measure of the risk-adjusted return of an asset or a portfolio of assets. It is useful when comparing investment strategies or managers. It takes into account the amount of risk exposure each has in relation to their returns. This can be very beneficial because though one manager may have very similar historical results as another, manager A may be taking a lot more risk in order to achieve the same results as manager B.
So how do you go about calculating the Sharpe Ratio? We’re going to do some math now; it may look scary but don’t freak out – it’s doable.
You can calculate the Sharpe Ratio by dividing the difference between the average return for the portfolio and the risk-free rate of return by the standard deviation of returns for the portfolio. Here’s the formula: S(x) = (Rx – Rf) / StdDev(x)
Where x = portfolio, Rx = average returns of portfolio, Rf = risk-free rate of return, and StdDev(x) = the standard deviation of returns for x. The yield on the 3 month US Treasury Bill is often used as the risk-free rate.
So what the Sharpe ratio tells you is something about the efficiency of the portfolio by showing the amount of return generated per unit of risk assumed. The higher the Sharpe Ratio the better relationship of reward to risk the portfolio is deemed to have. A negative Sharpe ratio means that you’d see better returns on the risk-free asset.
So if you want to be a more intelligent investor add this tool to your quiver and stay sharp, or Sharpe. (Sorry, I had to do it.)
Sharpe's Rifles 1993 Sharpe's Eagle 1993 Sharpe's Company 1994 Sharpe's Enemy 1994 Sharpe's Honour 1994 Sharpe's Gold 1995 Sharpe's Battle 1995 Sharpe's Sword 1995 Sharpe's Regiment 1996 Sharpe's Siege 1996 Sharpe's Mission 1996 Sharpe's Revenge 1997 Sharpe's Justice 1997 Sharpe's Waterloo 1997 Sharpe's Challenge 2006 Sharpe's Peril 2008
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Edith Sharpe's birth name is Edith Mary Sharpe.
Mick Sharpe goes by Mick Chewie Sharpe, and Chewie.
¿Qué tal, señorita Sharpe? ¡Hola, señorita Sharpe!
Sam Sharpe was buried in Sam Sharpe Square (Maybe..... I am not 100% sure)
Luis Sharpe's birth name is Luis Ernesto Sharpe Jr..
Toby Sharpe is 6'.
Masterpiece Theatre - 1971 Sharpe Sharpe's Rifles was released on: USA: 14 November 1993
Antonia Sharpe is 169 cm.
Danny Sharpe is 6' 1".