Whether shares or funds, anyone comparing different investments will sooner or later come across the Sharpe ratio. This ratio indicates how much return was achieved in relation to the risk taken, making investments easier to compare. It is a particularly useful tool for investors who are not only looking for the highest returns, but also for a balanced risk\/return ratio. In this article, we show how it is calculated, what it tells us and where its limits lie.<\/p>\n\n\n\n
The Sharpe ratio is a key figure that helps to Risk\/return ratio<\/strong> better assess the return on an investment. It shows how much excess return was achieved in comparison to the respective risk, i.e. how efficient an investment was in comparison to a risk-free alternative. <\/p>\n\n\n\n Yield alone says little if the extent to which the price has fluctuated in the meantime is not taken into account. The key figure therefore compares the additional return on an investment compared to an investment without risk (e.g. government bonds) with the volatility, i.e. the risk of fluctuation of an asset. The higher the value, the better the reward for the risk.<\/strong> A low or negative Sharpe ratio, on the other hand, can be a warning signal, for example because the investment hardly performs better than a call money account, but shows strong price fluctuations. <\/p>\n\n\n\n This makes different investments more objectively comparable, regardless of their volatility or asset class. Private investors are provided with meaningful guidance, especially when comparing similar investment products, and are Risk Management<\/a> of their investment strategy.<\/p>\n\n\n\n The ratio compares the excess return of an investment with its risk. The basic formula is:<\/p>\n\n\n\n Sharpe ratio = (investment return - risk-free interest rate)Volatility<\/p>\n\n\n\n This means for the respective values used:<\/p>\n\n\n\n Example:<\/strong><\/p>\n\n\n\n An ETF achieves an average return of 7 percent over one year, while the risk-free interest rate is 2 percent. The volatility is 10 percent. This results in:<\/p>\n\n\n\n Sharpe Ratio = (7% - 2%)10% = 0.5<\/p>\n\n\n\n This means that an excess return of 0.5 was achieved per unit of risk (here: 10 percent fluctuation). Depending on the market environment, this can be a solid value. In a historical comparison, values above 1.0 are considered good and above 2.0 very good.<\/p>\n\n\n\n Example 2:<\/strong><\/p>\n\n\n\n A Hedge funds<\/a> yields 15 percent, but also 20 percent volatility with the same risk-free interest rate of 2 percent.<\/p>\n\n\n\n Sharpe Ratio = (15% - 2%)20% = 0.65<\/p>\n\n\n\n Although the hedge fund has significantly higher Interest<\/a> the Sharpe ratio is only slightly better, as the risk is also significantly higher. This shows that a higher return does not automatically mean a better risk\/return ratio.<\/p>\n\n\n\n Important: The calculation always relates to a specific period and is not automatically transferable to the future. It should therefore be considered in the context of other fundamental values and not in isolation.<\/p>\n\n\n\nCalculate Sharpe Ratio<\/h2>\n\n\n\n
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Sharpe Ratio Interpretation:<\/h2>\n\n\n\n