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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. | ||
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*[[Backtesting]] | *[[Backtesting]] | ||
*[[Black-Scholes option pricing model]] | *[[Black-Scholes option pricing model]] | ||
*[[ | *[[Normal distribution]] | ||