Sharpe ratios above 1 are generally considered “good," offering excess returns relative to volatility. However, investors often compare the Sharpe ratio of a portfolio or fund with those of its peers or market sector. So a portfolio with a Sharpe ratio of 1 might be found lacking if most r...
Sharpe Ratio Formula Return (rx) The measured returns can be of any frequency (e.g., daily, weekly, monthly, or annually) if they are normally distributed. Herein lies the underlying weakness of the Sharpe ratio: not all asset returns are normally distributed. Kurtosis—fatter tails and...
The Nobel laureateWilliamF.Sharpedeveloped the Sharpe Ratio. According to Investopedia: “The Sharpe ratio is calculated by subtracting therisk-free rate from the return of the portfolio and dividing that result by the standard deviation of the portfolio’s excess return.” The formula is the foll...
Sortino Ratio:TheSortino ratiois similar to the Modified Sharpe Ratio but focuses on downside risk instead of prioritizing it. It also uses the standard deviation of negative returns in the denominator. M2 Measure:The M2 Measure introduces a risk aversion parameter into the Sharpe ratio formula. I...
Formula and Calculation What the IR Can Tell You IR vs. Sharpe Ratio Limitations Example FAQs The Bottom Line By Chris B. Murphy Updated September 24, 2024 Reviewed by Amy Drury Fact checked by Katrina Munichiello Investopedia / Sydney Burns ...
How to Recreate the Formula in Excel The Sharpe ratio formula can be made easy using Microsoft Excel. Here is the standard Sharpe ratio equation: Sharpe ratio = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return, or, ...
Formula and Calculation of the Information Ratio (IR) Although compared funds may be different in nature, the IR standardizes the returns by dividing the difference in their performances, known as their expectedactive return, by their tracking error: ...