What is the Sharp ratio of funds?
Sharp ratio is a standardized indicator of fund performance evaluation, and it is one of the three classic indicators that can comprehensively consider expected returns and risks at the same time.
The calculation formula of Sharp ratio: = [E (RP)-RF]/σ p.
Where E(Rp): the expected rate of return of the portfolio.
Rf: risk-free interest rate
σp: standard deviation of portfolio
Is the Sharp ratio of funds high or low?
The Sharp ratio of the fund reflects the extent to which the net growth rate of the unit venture fund exceeds the risk-free expected 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.
How is the Sharp ratio specifically reflected?
To illustrate the situation, let's take an example: suppose there are two investors, A, with an expected excess return of 8%, a standard deviation of 10%, a Sharp ratio of B, an expected excess return of 5%, a standard deviation of 5% and a Sharp ratio of 1.
So which of these two people has a greater chance of returning? Some people say 8%, of course it's wrong!
Indeed, at first glance, A has a high expectation of return on investment, and seems to have a better chance of winning. However, he ignored the sharp ratio. B's high Sharp ratio means that investors can exchange the "risk" of 1 unit for more return expectations, so B has a greater chance of return.
So much about whether the Sharp ratio of the fund is high or low, I hope it will help everyone. Warm reminder, financial management is risky and investment needs to be cautious.