Sharpe ratio (Sharpe Ratio)

There is a conventional feature in investment that the higher the expected remuneration of the underlying investment, the higher the volatility risk that the investor can tolerate, and the lower the expected remuneration, the less the risk of volatility. Therefore, the rational investor chooses the investment target and the portfolio's main purpose is: pursues the maximum reward under the fixed risk, or pursues the lowest risk under the fixed expected remuneration.

William Sharpe, the 1990 Nobel laureate in economics, developed the famed Sharpe ratio (Sharpe), starting with the most important theoretical basis for investment studies, CAPM (capital Asset Pricing model, asset pricing model). Ratio) to measure the performance of financial assets. The core idea of the William-Sharpe theory is that rational investors will choose and hold an effective portfolio of portfolios that maximize the expected returns at a given level of risk, or those that minimize risk at a given desired rate of return. It's easy to explain, he argues, that investors should at least demand a return on investment in return for a risk-free venture, or more, when building risky portfolios.

Sharpe ratio calculation Formula : =[e (Rp)-rf]/σp
where E (Rp): Portfolio expected return rate
Rf: Risk-free interest rate
Σp: Standard deviation of the portfolio

The goal is to calculate the amount of excess pay that a portfolio will incur per unit of total risk. The ratio is based on the concept of capital MARKETLINE,CML, the most common measurement ratio on the market. The Sharpe ratio applies when assets within the portfolio are risky assets. The sharp index represents the investor taking a fraction of the risk and can get a few rewards; if positive, the rate of return on behalf of the Fund is higher than the volatility risk; In this way, each portfolio can calculate Sharpe ratio, the ratio of return on investment to risk-taking, the higher the ratio, the better the portfolio.

For example, if the return on a national debt is 3%, and your portfolio is expected to be 15%, and your portfolio has a standard deviation of 6%, then 15%-3% will yield 12% (on behalf of your return beyond the risk-free venture), and then use 12%÷6%=2 to represent an investor with an increase of 1% per cent, in exchange for 2% of surplus income.

The sharp theory tells us that investment should be compared to risk, as far as possible to use scientific methods to take small risks to exchange large returns. So investors should grow up and try to avoid some of the risks that are not worth risking. At the same time, when you invest in a lack of investment experience and research time, you can let the real professionals (not only sell financial products to your sales) to help you build your own, can withstand the risk of minimizing the portfolio. These portfolios can measure risk and return ratios through Sharpe ratio.

Sharpe ratio (Sharpe Ratio)