What is the Sharpe Ratio and how do I interpret it?
An example of an AI chatbot conversation about the Sharpe Ratio and its interpretation.
What is the Sharpe Ratio and how do I interpret it?
The Sharpe Ratio is a measure of risk-adjusted return. It indicates how much excess return you receive for the extra volatility you endure for holding a riskier asset.
How do I calculate the Sharpe Ratio?
To calculate the Sharpe Ratio, subtract the risk-free rate from the return of the investment and then divide by the standard deviation of the investment's returns.
What does a higher Sharpe Ratio signify?
A higher Sharpe Ratio indicates a more attractive risk-adjusted return, meaning you're getting more return per unit of risk.
Can you give me an example of how to use it?
Sure! If an investment has a return of 10%, a risk-free rate of 2%, and a standard deviation of 5%, the Sharpe Ratio would be (10%-2%)/5% = 1.6.
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