Financial Terms / sharpe ratio

Sharpe Ratio: Risk-Adjusted Returns

The Sharpe ratio is a measure of a portfolio's risk-adjusted performance, proposed in 1966 by economist William F. Sharpe, which compares a fund's returns against the variability of a benchmark.


Sharpe Ratio = (Rp - Rf) / σp

How do I calculate the sharpe ratio?

The Sharpe ratio is a useful tool to measure the return of an investment relative to the risk taken. Named after American economist William Sharpe, the formula for calculating the Sharpe ratio is Sharpe Ratio = (Rp - Rf) / σp, where Rp is the expected return of the portfolio, Rf is the risk-free rate and σp is the standard deviation of returns. Using Sourcetable, you can easily calculate the Sharpe ratio for a single security or an entire portfolio. This will give you a good indication of the performance and risk of the investment.

What is the Sharpe Ratio?

The Sharpe ratio is a metric used to measure the risk-adjusted return of an investment. It was first proposed in 1966 by economist William F. Sharpe and compares an investment's return with its risk.

Key Points

How do I calculate sharpe ratio?
Sharpe Ratio = (Rp - Rf) / σp
Shares Represent Voting Rights
Common shares often come with voting rights, allowing shareholders to have a say in corporate decisions. This can include voting on major corporate actions and electing the company's board of directors. The number of votes a shareholder has is usually proportional to the number of shares they own.
Shares Can Be Classified
Some companies have more than one class of stock, each with different voting rights and dividend policies. For example, Class A shares might carry more voting rights than Class B shares. This structure allows certain groups, such as company founders, to maintain control over the company.
Shares Can Be Diluted
When a company issues additional shares, it can dilute the ownership percentage of existing shareholders. While the number of shares you own doesn't change, the percentage of the company those shares represent does decrease. This is a common occurrence in growing companies that need to raise additional capital.
Shares Can Be Repurchased
Companies can choose to buy back their own shares from the marketplace, a process known as a share repurchase or buyback. This can increase the value of the remaining shares, as the earnings are distributed among fewer shares. It also allows the company to reinvest in itself and potentially signals to the market that the company believes its shares are undervalued.
Shares Can Be Sold Short
Investors who believe a company's share price will decrease can borrow shares and sell them in the market, hoping to buy them back at a lower price and return them to the lender. This is known as short selling. However, short selling carries significant risk, as potential losses are theoretically unlimited if the share price increases instead of decreases.

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