Sharpe ratio won’t be anything new for those of you who read all of the information we put out. You may have stumbled upon this definition in one of our previous articles talking about the future UI of the platform. But today we wanted to talk about a bit more in depth - After all, it is one of the main risk/return measures, not only in finance, but on the Genesis Vision platform as well.
As usual we would like to keep it short, informative and useful.
The ratio is used to describe how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset. Remember, you always need to be properly compensated for the additional risk you take for not holding a risk-free asset.
For all of those wondering - here is the formula:
S (x) = (rx - Rf) / StdDev (x)
Where:
X is the investment
rx is the average rate of return of X
Rf is the best available rate of return of a risk-free security
StdDev(x) is the standard deviation of rx
We would go into more detail, dissecting the formula, but if we are being completely fair and honest - you don’t need that. Since everything is already calculated for you, you simply need to remember the general rule of thumb, which reads as follows: “a Sharpe ratio of more than 1 is considered to be a good risk-adjusted return, 2 or better is a great one, and 3 and over is excellent.”
The risk must always be addressed along with the reward when you are looking to choose your investments. The Sharpe ratio can help you determine the investment choice that will deliver the highest returns while considering risk, so keep your eye out for investment programs with high Sharpe ratios if you want your risk properly adjusted!
You can also catch up by reading our previous advice here.
Until the next time, visioners!