Examples
Suppose the asset has an expected return of 15% in excess of the risk free rate. We typically do not know if the asset will have this return; suppose we assess the risk of the asset, defined as standard deviation of the asset's excess return, as 10%. The risk-free return is constant. Then the Sharpe ratio (using the old definition) will be 1.5 ( and ).
For an example of calculating the more commonly used ex-post Sharpe ratio - which uses realized rather than expected returns - based on the contemporary definition, consider the following table of weekly returns.
| Date | Asset Return | S&P 500 total return | Excess Return |
|---|---|---|---|
| 7/6/2012 | -0.0050000 | -0.0048419 | -0.0001581 |
| 7/13/2012 | 0.0010000 | 0.0017234 | -0.0007234 |
| 7/20/2012 | 0.0050000 | 0.0046110 | 0.0003890 |
We assume that the asset is something like a large-cap U.S. equity fund which would logically be benchmarked against the S&P 500. The mean of the excess returns is -0.0001642 and the (sample) standard deviation is 0.0004542, so the Sharpe ratio is -0.0001642/0.0004542, or -0.3615359.
Read more about this topic: Sharpe Ratio
Famous quotes containing the word examples:
“No rules exist, and examples are simply life-savers answering the appeals of rules making vain attempts to exist.”
—André Breton (1896–1966)
“In the examples that I here bring in of what I have [read], heard, done or said, I have refrained from daring to alter even the smallest and most indifferent circumstances. My conscience falsifies not an iota; for my knowledge I cannot answer.”
—Michel de Montaigne (1533–1592)
“There are many examples of women that have excelled in learning, and even in war, but this is no reason we should bring ‘em all up to Latin and Greek or else military discipline, instead of needle-work and housewifry.”
—Bernard Mandeville (1670–1733)