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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:
  • Choice of Performance Measure for Hedge Funds
  • Risk Adjusted Return Measures: The Information Ratio
  • Risk Adjusted Return Measures
  • Performance Evaluation Issues Related to Hedge Funds
  • When Should an Asset Class Be Included in a Portfolio?
    • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    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)

    This entry was posted on Saturday, June 7th, 2008 at 7:36 am and is filed under Active Management, Investment Returns, Performance Measurement, Portfolio Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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