Sharp ratio is probably the most famous indicator to measure risks and benefits in the market. Sharp ratio was put forward by Nobel Prize winner william sharpe in 1966.
Sharp ratio, also known as return-volatility ratio, its core idea is to maximize the expected return of investment under a given risk and minimize the risk under a given expected return of investment. The minimum expected rate of return on investment should not be lower than the risk-free rate of return.
The calculation formula of Sharp ratio is: the average compound growth rate in a period MINUS the difference of risk-free rate of return and then divided by the standard deviation of the rate of return during the investment period.
Risk-free rate of return usually refers to the interest rate of national debt or time deposit in the same period.
For example, if the risk-free rate of return is 3%, the expected rate of return on investment is 15%, and the standard deviation of your portfolio is 6%, then use 15%-3% to get 12% (representing the income other than your risk-free investment), and then use12%/6%.
If the Sharp ratio is too low, we should think: Is the expected rate of return low? Or is the investor's portfolio fluctuating too much, resulting in too high standard deviation?
Sharp ratio reflects an important fact: in a period of time, the risk level is directly related to the volatility of returns, and the portfolio with lower volatility is more in line with the historical average return level.
Sharp ratio is usually used to measure stock portfolio strategy, usually the same fund. When measuring futures hedge funds, the effectiveness of Sharp ratio will be reduced. Generally speaking, * * * funds are generally engaged in long-term investment in stock portfolios, and the influence of factors such as timing and trading methods will be very low. The differences between different funds are limited to the differences in portfolio selection and diversification strategies.
MAR ratio is a good reference index when measuring the risk and return of futures hedge funds.
MAR is faster and more direct, and many strategy developers will use MAR to eliminate bad strategies.
The calculation formula of loss rate is as follows:
For example, the annualized rate of return of a hedge fund is 26%, and the maximum decline during the period is 15.5%, so the MAR value is 1.68.
As can be seen from the formula, the greater the MAR value, the better, that is, the rate of return is greater than the maximum loss. This ratio can also help us think about whether we should increase the average annual rate of return or focus on reducing the decline.
Although we can use Sharp ratio and Mark ratio to measure the risk of portfolio, these two ratios do not fully reflect the whole picture of real-world risk. For example, a portfolio with a high Sharp ratio or a high MAR ratio goes bankrupt due to fund management problems. If things like Wanda Cinema and Fuxing Medicine Black Swan happen on Thursday, it will be turned upside down overnight. However, as two important indicators to measure risks and benefits, it is still worth our reference.