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My sharpe Ratio for my portfolio is 1.08. What does this mean? Or how would i...

My sharpe Ratio for my portfolio is 1.08. What does this mean? Or how would i describe my number.

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  • Firstly the FORMULA for Sharpes Ratio is : (Expected Return - Rf) / Standard Deviation
  • Now, the Interpretaion of this FORMULA is that "HOW MUCH EXTRA RETURN" over and above Risk free Return our Portfolio is Earning "PER UNIT OF RISK" that we are taking.
  • We Deduct Risk Free Rate because that is what we can earn otherwise also without entering into Market & without taking any Risk.
  • But now since we have Entered Market therefore we would like to see that What is our Actual Return (ie ER - Rf) which would reflect that this is the return we have got by taking this much risk (ie. Std. Deviation)
  • Sharpes Ratio of 1.08 Shows that our Portfolio is Actually Earning (ie after deducting Rf) 1.08 unit For taking per unit of Risk.   In Other Words, for every 1 unit of Risk (ie. standard deviation), our Portfolio Earns 1.08 units of Extra Return.
  • It basically shows the Reward (in times) that we are getting by Investing in Market & taking a Risk.
  • Suppose if we have not Invested in Market & rather have invested in any Bank then we would have got Risk Free rate. BUT now since we have Invested in Market which is RISKY hence we need to measure that how much EXTRA are we getting for the RISK we have taken by entering into Market.

HOPE IT HELPS. STILL IF NEED ANY FURTHER EXPLANATION OR DOUBT PLEASE LET ME KNOW IN COMMENT :)

jeff jeffy answered 1 year ago
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