What is the Sharpe Ratio?
The Sharpe ratio is a measure of risk–adjusted performance that indicates the level of excess return per unit of risk. In the calculation of Sharpe ratio, excess return is the return over and above the short–term risk free rate of return and this figure is divided by the risk, which is represented by the annualized volatility or standard deviation. In summary the Sharpe Ratio is equal to compound annual rate of return minus rate of return on a risk–free investment divided by the annualized monthly standard deviation. The greater the Sharpe ratio the greater the risk–adjusted return. As calculated on the individual reports the Sharpe ratio is calculated as follows; (Compound Annual ROR – risk free ROR (calculated from T–bills)) / Annualized Std. Dev. of Mo. ROR or Annualized Std. Dev.
