Sharpe ratio

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Sharpe ratio

A measure of a portfolio's excess return relative to the total variability of the portfolio. Related: Treynor index. Named after William Sharpe, Nobel Laureate, and developer of the capital asset pricing model.

Sharpe Benchmark

In financial econometrics, a model for a portfolio's performance that attempts to account for a money manager's index-like tendencies. In other words, the Sharpe benchmark attempts to statistically calculate whether a portfolio's success was due to good management or the taking of excessive risk. The model measures a company's or portfolio's performance against a series of securities indices.

Sharpe ratio.

Using the Sharpe ratio is one way to compare the relationship of risk and reward in following different investment strategies, such as emphasizing growth or value investments, or in holding different combinations of investments.

To figure the ratio, the risk-free return is subtracted from the average return of an investment portfolio over a period of time, and the result is divided by the standard deviation of the return.

A strategy with a higher ratio is less risky than one with a lower ratio.

This type of analysis, which is done using sophisticated computer programs, is named for William P. Sharpe, who won the Nobel Prize in economics in 1990.

References in periodicals archive ?
"When you look at mutual funds that have Sharpe ratios of 0.35, that is crazy risky -- but no one seems to remember 2008."
Consequently, Goldman Sachs believes that this view is supportive of the Egyptian local bond market in 2019, which they think will provide one of the highest Sharpe ratios in the emerging markets space.
To test whether there are trading strategies that could profitably exploit the observed differences in stock returns around these shocks, the researchers compared Sharpe ratios for a buy-and-hold strategy and a monetary momentum strategy for various event windows around the FOMC meetings.
To calculate the Sharpe ratios for each portfolio, the excess historical average monthly returns over the Selic rate for the same month were used, divided by the average monthly volatility, as shown in Table 6.
LOCB has outperformed peers on a risk-adjusted basis, with lower drawdowns and higher Sharpe ratios over three and five years, which is consistent with its investment objectives.
He used the usual performance measures, the Sharpe, Treynor ratios and Jensen Alpha in addition to the adjusted Sharpe Ratios, Modigliani measure and time and selectivity ability.
We find that Sharpe ratios of the shorter maturity portfolios are higher than those of longer maturity portfolios.
It is worth mentioning that, by applying the second momentum-weighted approach, we were able to appreciate an almost linear pattern, where the risk adjusted returns improved until a 12-level concentration (or 60% of the total amount invested in the 12 highest momentum stocks), obtaining for both selection criteria (and 12/0/2 months) average annualized returns of 8.97% and 12.40% with a volatility of 27.16% and 25.00%, leading Sharpe ratios of 0.32 and 0.49, respectively.
The main ratio characteristics presented in Table 3, despite the fact that both Treynor and Sharpe ratios combine the reward and risk, Treynor ratio evaluates fund's reward related with the risk and contrary to the Sharpe ratio, this indicator evaluates systemic and not the general portfolio risk.
Lai, "Conditional sharpe ratios," Finance Research Letters, vol.
"Incredibly, research suggests that poor market timing driven by retail mutual fund flows lowers mutual fund Sharpe ratios by 17% and accounts for approximately 70% of the total underperformance of mutual funds relative to passive benchmarks."
Portfolio performance evaluation with generalized sharpe ratios: Beyond the mean and variance.