Sharpe Ratio 夏普比率

The Sharpe ratio was developed by Nobel laureate William F. Sharpe and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.

Formula and Calculation of Sharpe Ratio

$$\text{Shart Ratio}=\frac{R_p-R_f}{{\sigma }_p}$$ where
$R_p=$ return of portfolio
$R_f=$ risk-free rate
${\sigma }_p=$ standard deviation of the portfolio’s exceed return

The Sharpe ratio is calculated by subtracting the risk-free rate from the return of the portfolio and dividing that result by the standard deviation of the portfolio’s excess return.

Key Takeaways

$\cdot$ The Sharpe ratio adjusts a portfolio’s past performance—or expected future performance—for the excess risk that was taken by the investor.
$\cdot$ A high Sharpe ratio is good when compared to similar portfolios or funds with lower returns.
$\cdot$ The Sharpe ratio has several weaknesses including an assumption that investment returns are normally distributed.

Literature

Mustafa C¸ Pınar Reha H. Tütüncü , 2005, Robust Profit Opportunities in Risky Financial Portfolios.