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Published On: Mon, Apr 8th, 2013

The Sharpe ratio

The Sharpe ratio was developed by William F. Sharpe and is also known as the Sharpe Index, the Sharpe Measure and the Reward-To-Variability ratio.

The Sharpe ratio measures how well an investor is compensated for the risk taken. Calculated by subtracting the risk-free rate (like a 10 yr U.S. Treasury bond) from the rate of return for a portfolio, and dividing the results by the standard deviation of the portfolio returns.  A higher Sharpe ratio indicates a better return for the same risk when comparing two assets against a common benchmark.

The Sharpe ratio is only as accurate and as useful as the data it is supplied with and it should be derived from the performance of the underlying assets rather than the overall fund returns.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

 

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