What are some real-world examples of the Sharpe Ratio?

What are some real-world examples of the Sharpe Ratio?

The Sharpe Ratio is commonly used in finance to assess the performance of investment portfolios. For example, a hedge fund might report a Sharpe Ratio of 1.5, indicating that it has generated 1.5 units of excess return per unit of risk.

Can you give me another example?

Sure! A mutual fund might have a Sharpe Ratio of 2.0, suggesting it has provided a high return relative to the risk taken, making it an attractive option for investors.

How do I calculate the Sharpe Ratio?

To calculate the Sharpe Ratio, subtract the risk-free rate from the portfolio's return and then divide by the standard deviation of the portfolio's returns. The formula is: Sharpe Ratio = (Return of Portfolio - Risk-Free Rate) / Standard Deviation of Portfolio Returns.

What does a higher Sharpe Ratio indicate?

A higher Sharpe Ratio indicates that an investment has a better risk-adjusted return. It means the investment is providing more return per unit of risk, which is generally more desirable for investors.