Difference between revisions of "Sharpe ratio"

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The '''Sharpe ratio''' is a financial measure of the compensation (called a "risk premium") an investor receives for bearing an additional unit of risk. It is defined as
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The '''Sharpe ratio''' or '''reward-to-variability ratio''' is a financial ratio that measures the compensation (called a "risk premium") an investor receives for bearing an additional unit of risk. It is defined as
  
 
: <math>S = \frac{E(r) - r_f}{\sigma} </math>
 
: <math>S = \frac{E(r) - r_f}{\sigma} </math>
  
 
where <math>E(r)</math> is the asset's expected return, <math>r_f</math> is the risk-free rate (normally, the rate of return of a United States T-bill) and <math>\sigma</math> is the risk associated with the investment.
 
where <math>E(r)</math> is the asset's expected return, <math>r_f</math> is the risk-free rate (normally, the rate of return of a United States T-bill) and <math>\sigma</math> is the risk associated with the investment.
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==Development==
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The concept of a Sharpe ratio was first developed by William Sharpe, a professor of finance at [[Stanford University]].
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[[Category:Finance]]

Latest revision as of 03:00, October 24, 2011

The Sharpe ratio or reward-to-variability ratio is a financial ratio that measures the compensation (called a "risk premium") an investor receives for bearing an additional unit of risk. It is defined as

where is the asset's expected return, is the risk-free rate (normally, the rate of return of a United States T-bill) and is the risk associated with the investment.

Development

The concept of a Sharpe ratio was first developed by William Sharpe, a professor of finance at Stanford University.