Sharpe Ratio
A risk-adjusted return measure factoring in volatility and a risk-free rate.
Detailed Description
Sharpe Ratio
What is the Sharpe Ratio used for?
The Sharpe Ratio is used to evaluate the risk-adjusted return of an investment or portfolio.
Who developed the Sharpe Ratio?
The Sharpe Ratio was developed by Nobel laureate William F. Sharpe in 1966.
What does a higher Sharpe Ratio indicate?
A higher Sharpe Ratio indicates a more attractive risk-adjusted return.
What are some limitations of the Sharpe Ratio?
The Sharpe Ratio assumes normally distributed returns, does not differentiate between upside and downside volatility, and is affected by the choice of the risk-free rate.
How is the Sharpe Ratio calculated?
The Sharpe Ratio is calculated using the formula: (R_p - R_f) / σ_p, where R_p is the expected return, R_f is the risk-free rate, and σ_p is the standard deviation of the portfolio's excess return.