The sharpe ratio is a widely used performance measure, i.e. the return on the portfolio is adjusted for the risk incurred in generating it. In calculating the Sharpe ratio the return on the portfolio in excess of a lowrisk return is divided by the volatility of the returns on the portfolio. A high sharpe ratio indicates a high performance.
To calculate the Sharpe ratio, HSZ Group currently assumes that investors should be able to earn a return of 2.5 percent on a lowrisk portfolio. A mean return in excess of 2.5 percent can be obtained only if investors are willing to incur additional risk. A positive and large Sharpe ratio implies that returns in excess of the lowrisk rate do not require investors to incur much additional risk. If the Sharpe ratio is small but still positive, excess returns cannot be obtained unless investors are willing to assume substantial additional risk. A negative Sharpe ratio means that the portfolio manager has not even been able to earn the lowrisk rate. The Sharpe ratio is useful for comparing the returnrisk characteristics of different portfolios.
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