Sharpe Ratio Calculator for Different Timeframes

Calculating the Sharpe ratio is vital for assessing the risk-adjusted return of an investment portfolio over different timeframes.

Historical Background

The Sharpe ratio, developed by William F. Sharpe in 1966, measures the excess return per unit of risk. It has become a standard for evaluating the performance of investment portfolios, helping investors understand the trade-off between risk and return.

Calculation Formula

The formula to calculate the Sharpe ratio is:

\[ \text{Sharpe Ratio} = \frac{\text{Portfolio Return} - \text{Risk-Free Rate}}{\text{Standard Deviation}} \]

Example Calculation

If your portfolio return is 10%, the risk-free rate is 2%, and the standard deviation is 5%, the calculation would be:

\[ \text{Sharpe Ratio} = \frac{10 - 2}{5} = \frac{8}{5} = 1.6 \]

Importance and Usage Scenarios

The Sharpe ratio helps investors compare the risk-adjusted performance of various assets or portfolios, making it crucial for portfolio management and investment decisions, especially across different timeframes.

Common FAQs

1. What does a higher Sharpe ratio indicate?

   • A higher Sharpe ratio indicates better risk-adjusted returns, suggesting that an investment is yielding more return per unit of risk.

2. Can the Sharpe ratio be negative?

   • Yes, a negative Sharpe ratio indicates that the portfolio's return is less than the risk-free rate, suggesting poor performance.

3. How does timeframe affect the Sharpe ratio?

   • Different timeframes can yield different returns and risks, which may influence the Sharpe ratio. It's important to calculate it consistently over the same timeframe for meaningful comparisons.