It is a metric for fund performance, which enables the ranking of funds on the risk adjusted basis This measure is based on the comparison of excess return per unit of risk, risk being measured by standard deviation. Excess return is defined as the actual return of the fund less the risk free rate of return.
Formula for the Sharpe ratio is
Si=(Ri – Rf)Si
Where Si is standard deviation of the fund
Ri represents return on fund,
Rf is risk free rate of return
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.
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