Risk Adjusted Return Measures: The Sharpe Ratio
The Sharpe ratio compares excess returns to total portfolio risk, measuring risk as the standard deviation of portfolio returns.
The numerator of the Sharpe ratio is the difference between the portfolio return and the risk-free rate. The denominator is the standard deviation of portfolio returns.
The Sharpe ratio may identify a manager as not being skillful even when the Treynor measure or Jensen’s alpha suggest skill. This could result when the manager accepts large amounts of non-systematic risks (which would be reflected in standard deviation of returns but not portfolio beta.)
For more information, see all articles on: Active Management, Investment Returns, Performance Measurement, Portfolio Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
