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eHow Education College & Higher Education College How to Calculate Sharpe Ratio
By Jess Kroll
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The Sharpe Ratio, created in 1966 by Nobel laureate William F.
Sharpe, is an equation to calculate risk-adjusted performance of a
stock portfolio. The ratio determines whether a portfolio's profit
can be attributed to correct thinking or high risk. The higher the
ratio, the better the portfolio has performed after being adjusted
for risk. While a certain portfolio may generate a great profit, that
profit may be the result of huge and potentially dangerous risk.
The exact calculation for the ratio requires subtracting the rate of
a risk-free investment from the expected portfolio return, divided
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by the portfolio's standard deviation: Images
(rate of portfolio return - risk free rate) / portfolio standard deviation
What Is a Sharpe Ratio How to Calculate
in a Mutual Fund? Portfolio Risk
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How to Do Fractions
List the annual returns of your portfolio. If your portfolio is five years old, begin from the How to Value a Business
first year. For example: How to Find People
2005: 12 percent Ratio Calculator
Portfolio
2006: -3 percent
2007: 9 percent
2008: -8 percent
2009: 6 percent
Calculate the average of portfolio returns by adding up each return percentage and
dividing by the number of years.
For example: 12 + -3 + 9 + -8 + 6 = 3.2 READ ARTICLE
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This is your portfolio's average return. Lunchboxes with These Creative
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Subtract each year's individual return from average portfolio return. For example:
2005: 3.2 - 12 = -8.8
2006: 3.2 - -3 = 6.2
2007: 3.2 - 9 = -5.8 How to Calculate
Treynor Ratio
2008: 3.2 - -8 = 11.2
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2009: 3.2 - 6 = -2.8
How to Calculate a
Square the individual deviations. Quick Ratio
For example:
2005: -8.8 x -8.8 = 77.44
How to Use a Sharp
Calculator
2006: 6.2 x 6.2 = 38.44
2007: -5.8 x -5.8 = 33.64
2008: 11.2 x 11.2 = 125.44 How to Repair a
Sharp Calculator
2009: -2.8 x -2.8 = 7.84
Find the sum of each year's squared deviation.
For example: 77.44 + 38.44 + 33.64 + 125.44 + 7.84 = 282.8 How to Calculate
Loss Ratio
Divide the sum by the number of years minus one.
For example: 282.8 / 4 = 70.7
How to Calculate
Calculate the square root of this number. Leverage Ratio
For example: 8.408
This the annual standard deviation of the portfolio.
Place your three numbers into the Sharpe Ratio equation.
Subtract the rate of risk-free return from the rate of return for the portfolio.
For example: (Using the previous numbers and the rate of return on a five-year US
government bond) 3.2 - 1.43 = 0.3575
Divide by the standard deviation.
For example: 0.3575 / 8.408 = 0.04252 (approximate)
This is your Sharpe Ratio.
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Formula to Calculate
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WhereDoesAllMyMoneyGo.com: Calculate Your Own Portfolio's Standard Deviation
Investopedia: Sharpe Ratio Definition
Investopedia: Understanding the Sharp Ratio
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How to Calculate the Sortino Ratio
The Sortino Ratio is a modified version of the Sharpe ratio. It is used by investment
managers to calculate portfolio risk. The...
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