Sharpe Ratio

From MarketsWiki
Jump to navigation Jump to search


HKEX 728x90 v6.gif


A Sharpe Ratio, developed by Prof. William Sharpe of Stanford University, is a risk measure that evaluates the relationship of return and volatility. It gives investors the ability to determine how much excess return a manager can produce for the increase in risk that the investor assumes.

By dividing the portfolio’s excess return (defined as the return above the risk-free rate received by US Treasury bills), by the standard deviation of the portfolio, investors can determine the additional return per unit of risk. A Sharpe ratio of 1:1 indicates that the rate of return is proportional to the risk assumed in seeking that reward.

The higher the Sharpe Ratio, the greater return per unit of risk taken.[1].[2]

References[edit]

  1. "Hedge fund terms”. Liberty Gateway.
  2. "Hedge Fund Glossary ”. Hedge Fund Lounge.