The Sharpe ratio or Sharpe index, also referred to as the Sharpe measure or reward-to-variability ratio, is an established measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a trading strategy. Named after William Forsyth Sharpe, this calculation is useful in characterizing how well the return of an asset compensates the investor for the risk taken. When comparing two assets each with the expected return E[R] against the same benchmark with return Rf, the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios. However like any mathematical model it relies on the data being correct. To be useful, the Sharpe ratio should be derived from the performance of the underlying assets rather than the fund returns.
This informative treatise will have traders gaining more in depth understanding of the variables involved in the trades he chooses to enter, making his financial selections more informed and well rounded ... download the eBook to read more
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