The Sharpe Ratio is a ratio that measures the profitability There is an excess average (difference between the profitability of a given portfolio and that of a risk-free asset), per unit of total risk that a portfolio can bear.
This meter can indicate the quality of a Investment fund, since it compares them with others that are of the same conditions. However, as we always say, it is important that we compare with other indicators.
Performance is not the only factor that should be taken into account to measure the quality of a fund. The risk that exists between the assets of different sectors is also a fundamental aspect to take into account. Therefore, the Sharpe ratio measures the relationship between the two factors: risk and return.
How to calculate the Sharpe Ratio?
In order to calculate this ratio, we have to take into account the marginal profitability of the fund in one term (difference between the profitability of the fund and the investment without risk, such as treasure letters) and divide it by the volatility of the term that has been set for said profitability.
However, the interesting thing is to know what the data tells us and how to interpret them.
How to interpret the data?
Interpreting the data that the Sharpe ratio gives us we can divide or summarize it in the following points:
- If the ratio is high, the investment will be attractive, since the risk is higher and is offset by volatility.
- If the ratio is negative, return below the risk-free return.
- If the ratio is less than 1, the return on the asset is less than its risk.