Question

What is sharp ratio?

• What are the measures of normal distribution?

• What is the importance of value at risk?

Answer 1

1. This ratio was developed to help investors understand the risk and return relation for a particlar investment. It is used for calculating the risk adjusted return. Using this ratio, you can see how much extra return you have earned on certain volatility. The formula for calculating this ratio is Rp-Rf/Op where Rp= Return of Portfolio, Rf= Risk-free rate and Op= Volatility
2. A Normal distribution is a bell shaped curve and it is determined by the mean and the standard deviation. Standard deviation is the major measure for the normal distribution.where 68% of the total observations fall within +/- 1 standard deviations, 95% of the total observations fall within +/- 2standard deviations and 99.7% of the total observations fall within +/- 3 standard deviations.
3. Value at Risk or VAR is a measure of market risk, which is the most important risk for any financial institution. It is a measure of the risk of the loss of investments and is a bell shaped curve falling under the normal distribution. This method is used by firms to see how much the assets are required to cover the lossses. For example- If a stock of an entity has a VAR of 10% for $1 million, it means that thar there is a 10% probability that the portfolio's value will decline by $1 million in 1 day.