First, the calculation formula of Sharp ratio
Sharp ratio is an index first proposed by william sharpe, the Nobel laureate in economics, in 1966. The calculation formula is as follows:
SharpRatio=(Rp_Rf)/σp
Where Rp represents the expected rate of return of an asset or portfolio, Rf represents the risk-free rate of return, and σp represents the standard deviation of the asset or portfolio. The higher the Sharp ratio, the better the risk-adjusted rate of return of an asset or portfolio.
Second, the significance of Sharp ratio
Sharp ratio can not only measure the relationship between risk and return of assets or portfolios, but also measure the investment skills and performance of investment managers. If the Sharp ratio of an investment manager is higher than the average level of similar funds or indexes, it shows that the manager's portfolio performs better and his investment strategy is better. Therefore, the significance of Sharp ratio lies not only in measuring the risk and return of portfolio, but also in evaluating the performance of investment managers.
Third, how to optimize the Sharp ratio?
In order to optimize the Sharp ratio of the combination, the following measures can be taken:
1. Reduce portfolio risk. Reduce portfolio risk by selecting low-risk assets, diversifying investment and hedging risks;
2. Improve the return of the portfolio. Optimize stock selection strategy, increase investment ratio and other ways to improve portfolio income;
3. Reduce the risk-free rate of return. Leverage investment and loan investment to increase investment funds, thus reducing the risk-free rate of return.
Fourthly, the limitation of Sharp ratio.
Although Sharp ratio is of great significance in measuring the risk and return of assets or portfolios, it also has certain limitations. Mainly in the following aspects:
1. Sharp ratio can't fully measure investment risk. Because the Sharp ratio only considers the standard deviation and does not consider other risks in the portfolio, such as political risk and market liquidity risk, it cannot fully reflect the risk degree of the portfolio.
2. Sharp ratio is highly dependent. Sharp ratio is calculated based on historical data, so its result is greatly influenced by historical data and its predictability to the future is limited.
3. Sharp ratio ignores the non-normal distribution of expected return of assets. Because the returns of most assets are non-normal, the calculation results of Sharp ratio may be distorted, and it is impossible to better measure the risk of extreme events.