What is Sharpe's ratio?

Sharpe ratio is a very simple measure of evaluation of the benefits of investment. Its aim is to calculate the redundant return, which is a return that is achieved beyond what would be achieved by simply monitoring the market as a whole. This return is then considered in terms of the risk that has been involved. While the simplicity of the Sharpe ratio is its main benefit, it can also be a weakness. The balance between the potential or expected return on investment and the risk that the actual return will be lower or even negative is the main factor in most investment decisions. In order to make this assessment correctly, the return must be assessed in the context of other options. Most remarkably, the return on a particular investment should be compared with the amount of investment risk.

Sharpe ratio is one way to achieve this. In its simple form, the ratio is the differential return divided by a standard deviation. On the other hand, there is a differential return of the return on portfolio of minimumWith return to the benchmark. All these concepts are much easier than their names can indicate.

Portfolio return is a return on investment, expressed as a percentage. Returning to the benchmark can be calculated in two ways. One of them is to compare it to an equivalent investment with an effective risk, such as the government issued by debt. Another method is to compare it to the performance of the entire related market. For example, when evaluating individual shares, it could be a measure of the related stock market. The former method is sometimes known as the original Sharpe ratio, while the second is known as a generalized Sharpe ratio or information ratio.

Standard deviation is a comparative measure of performance of investment compared to the performance of the entire market. Rather than simply comparing its final level, this measure focuses on the overall range of movement over time. This is the ObvYKKE considers an indicator of how much risk is involved in the investment: the more different it differs, the greater the potential for both profits and losses.

Using the Sharpe ratio, it is possible to create what is called a return on risk. This shows how well the investment is made compared to the risk level. This can be an indicator of the investor's skill. For example, one fund manager could have achieved a higher return than an opponent over the last year. If the opponent has a higher Sharpe ratio, this may indicate that the first manager simply was lucky with his investment and the opponent is a better bet to balance the risk of VS in the future.

It is possible to use the Sharpe ratio of either retrospective or as a prediction. Use on historical data is called ex po calculation. Application for forecasts is an ex ante calculation.