Calculation of Sharp Ratio and Its Significance
The calculation of Sharp ratio is very simple. The Sharp ratio of the fund can be obtained by subtracting the risk-free interest rate from the average value of the fund's net growth rate and then dividing it by the standard deviation of the fund's net growth rate. It reflects the extent to which the net growth rate of unit venture fund exceeds the risk-free rate of return. If the Sharp ratio is positive, it means that the average net growth rate of the fund during the measurement period exceeds the risk-free interest rate. In the case that the interest rate of bank deposits in the same period is risk-free interest rate, it means that investment funds are superior to bank deposits. The greater the Sharp ratio, the higher the risk return of fund unit risk.
The theoretical basis of ranking fund performance with Sharp ratio is that investors can borrow at risk-free interest rate, so that under the same risk, funds with high Sharp ratio can always get higher investment income than funds with low Sharp ratio by determining appropriate financing ratio. For example, if there are two funds A and B, the average annual net growth rate of Fund A is 20%, the standard deviation is 10%, the average annual net growth rate of Fund B is 15%, the standard deviation is 5%, and the average annual risk-free interest rate is 5%, then the Sharp ratios of Fund A and Fund B are 1.5 and 2, respectively. We can invest the same amount of money in B at the level of risk-free interest rate (the financing ratio is 1: 1), then the standard deviation of B will be expanded by 1 times, reaching the same level as that of A, but at this time, the net growth rate of B is equal to 25% (that is, 2 # 15%), which is more commonly used as the monthly Sharp ratio and.