Sharp ratio is an extremely important measure in investment. It is a risk-adjusted performance index, which is used to evaluate whether a portfolio or portfolio's performance meets market expectations and whether the income under the corresponding risks is competitive. This paper will comprehensively expound the meaning, calculation method, advantages and disadvantages of Sharp ratio and how to improve Sharp ratio from many angles.

First, the meaning of Sharp ratio

Sharp ratio was put forward by william sharpe, a Nobel laureate in economics, in 1966. It calculates the risk-adjusted performance according to the excess rate of return of assets or portfolios. Excess rate of return refers to the actual rate of return of an asset or portfolio minus the risk-free rate of return, and return risk refers to the volatility of an asset or portfolio. The higher the Sharp ratio, the better the performance of an asset or portfolio after absorbing risks.

Second, the calculation method of Sharp ratio

The calculation formula of Sharp ratio is:

Sharp ratio =(Rp-Rf)/σp

Among them, Rp is the excess rate of return of assets or portfolios; Rf is risk-free rate of return; σp is the volatility of an asset or portfolio.

Third, the advantages and disadvantages of Sharp ratio

Advantages:

1. Measure the performance of assets or portfolios: Sharp ratio can truly reflect the relative performance of assets or portfolios with the market.

2. It is effective for different types of assets or portfolios: Sharp ratio can be widely applied to all types of assets or portfolios.

3. Risk can be effectively measured: Sharp ratio can not only measure the income of an asset or portfolio, but also consider its fluctuation factors, so that Sharp ratio can comprehensively evaluate the performance of an asset or portfolio.

Disadvantages:

1. Only consider volatility without considering skewness and kurtosis: Although Sharp ratio can reflect the volatility of assets or portfolios, it does not consider skewness and kurtosis of volatility, so the evaluation of Sharp ratio may be wrong in extreme cases.

2. For long-term assets or portfolios, the value cannot be fully reflected: long-term assets or portfolios may have large price fluctuations, but in the long run, the risk is reduced, and the Sharp ratio may be assessed as lower than the actual value.

3. Do not consider the distribution of income: Sharp ratio only considers the standard deviation of income, regardless of the shape of income distribution, so Sharp ratio can not fully reflect investors' concern about income distribution.

Fourth, how to improve the Sharp ratio?

1. Optimize the allocation of assets or portfolios, reduce risks and improve returns.

2. Hold diversified assets to avoid excessive concentration in certain industries or companies.

3. Reduce investment costs and taxes, and increase real income.

4. Reduce risks by combining other risk management tools (such as stop loss orders and futures).

5. Make forward-looking judgments on market changes and improve the risk resistance of assets or portfolios.