Definition
The Sharpe Ratio, developed by William Sharpe, measures risk-adjusted returns by dividing excess return (above the risk-free rate) by standard deviation. Higher Sharpe Ratios indicate better risk-adjusted performance. A Sharpe Ratio above 1 is generally considered good, above 2 is very good, and above 3 is excellent. The ratio helps compare investments with different risk levels and is widely used in evaluating portfolios and fund managers. However, it assumes normally distributed returns.
Formula
Example
Fund A returns 15% with 20% volatility (Sharpe: 0.65 assuming 2% risk-free rate). Fund B returns 10% with 8% volatility (Sharpe: 1.0). Despite lower returns, Fund B offers better risk-adjusted performance.
FAQ
What is Sharpe Ratio?
Risk-adjusted return measuring excess return per unit of total risk.
How do you calculate Sharpe Ratio?
A common formula for Sharpe Ratio is: 夏普比率 = (投资组合收益率 - 无风险利率) / 投资组合标准差
Why is Sharpe Ratio important?
Sharpe Ratio helps investors evaluate risk metrics and make more informed decisions.