Sharpe ratio: Difference between revisions
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{{a|g|}}The [[Sharpe ratio]], named after William F. Sharpe, who developed it in 1966, measures the performance of a portfolio against a risk-free asset. It is defined as the difference between the returns of the investment and the risk-free return, divided by the [[standard deviation]] of the investment (being, a somewhat optimistically limited measurement of its [[volatility]]). The higher your [[Sharpe ratio]], the more awesome a [[hedge fund]] manager you are. A Sharpe ratio of 4 or more puts you in “I’m so good it hurts and, if I ever knew what hubris was, I just don’t care about it now” territory. | {{a|g|}}The [[Sharpe ratio]], named after William F. Sharpe, who developed it in 1966, measures the performance of a portfolio against a risk-free asset. It is defined as the difference between the returns of the investment and the risk-free return, divided by the [[standard deviation]] of the investment (being, a somewhat optimistically limited measurement of its [[volatility]]). The higher your [[Sharpe ratio]], the more awesome a [[hedge fund]] manager you are. A Sharpe ratio of 4 or more puts you in “I’m so good it hurts and, if I ever knew what hubris was, I just don’t care about it now” territory. | ||
The thing is, [[Sharpe ratio]]s work really well until they don’t. | The thing is, [[Sharpe ratio]]s work really well ''until they don’t''. | ||
===Famous [[Sharpe ratio]]s=== | ===Famous [[Sharpe ratio]]s=== | ||
*'''[[LTCM]]''': 4.35, right up until it imploded, nearly bringing down the global financial system with it. | *'''[[LTCM]]''': 4.35, right up until it imploded, nearly bringing down the global financial system with it. | ||
*'''[[Madoff]]''': About 4. | *'''[[Madoff]]''': About 4. | ||
*'''SAC Capital''': 2.5 | |||
*'''Berkshire Hathaway''': 0.76 | *'''Berkshire Hathaway''': 0.76 | ||
{{sa}} | {{sa}} | ||
*[[Backtesting]] | *[[Backtesting]] | ||
*[[Black-Scholes option pricing model]] | *[[Black-Scholes option pricing model]] | ||
*[[ | *[[Normal distribution]] | ||
Latest revision as of 11:19, 22 August 2021
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The Sharpe ratio, named after William F. Sharpe, who developed it in 1966, measures the performance of a portfolio against a risk-free asset. It is defined as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment (being, a somewhat optimistically limited measurement of its volatility). The higher your Sharpe ratio, the more awesome a hedge fund manager you are. A Sharpe ratio of 4 or more puts you in “I’m so good it hurts and, if I ever knew what hubris was, I just don’t care about it now” territory.
The thing is, Sharpe ratios work really well until they don’t.
Famous Sharpe ratios
- LTCM: 4.35, right up until it imploded, nearly bringing down the global financial system with it.
- Madoff: About 4.
- SAC Capital: 2.5
- Berkshire Hathaway: 0.76