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# Sharp ratio

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Jan 29, 2011 09:41 am
#1

Antworten: 75
Member since: 01/12/2010

Whenever you search for "Sharp ratio" you will find a very vague definition like: “The Sharp ratio is a risk-adjusted measure of performance". So what does that mean?

FxStat offers this Ratio for every performance available but after talking to some members, I discovered that few of them know what this really means. That's why I will try to explain the Sharp ratio here in a simple way.

Basically, the Sharp ratio compares two things; the return of the portfolio and the amount of risk taken.

The return of the portfolio is the amount of profit you get over your initial investment. For example: if you invest 10.000\$ and after a while your account becomes 11.000\$. Then your profits are 1.000\$ which is 10%

The amount of risk-free is the return you can get over your investment if you invested in some "safe" instruments. For example, if you invested those 10.000\$ in a 10-year U.S. Treasury bon that gives a 4% interest, then your risk-free is 4%. There's a reason why I have put "safe" in quotation. This is because Sharp ratio considers that U.S. bonds are risk-free. This is wrong! U.S. bonds are low risk investment, maybe the lowest you may ever find, but it's NOT a "risk-free" investment.

Now, FxStat understands that every one of us has different criteria. Everyone of us may need to compare the same performance with different bonds/stocks or simple bank interest. That is why FxStat made the risk-free equal to 1%. This means that you just need to multiply he Sharp ratio with your risk-free ratio. For example; if FxStat is showing a sharp ratio of 1.5% and your risk-free ratio is 3%. Then, your Sharp ratio is 1.5 X 3 = 4.5%.

Sep 06, 2011 12:01 am

Antworten: 513
Member since: 08/02/2011

thank you dear i was so confused when ever some one ask me about my sharp ratio and i say i dont know but from now i can calculate myself. thank you dear

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Oct 16, 2011 04:19 pm
Sasha User

Antworten: 836
Member since: 16/05/2011

Is it possible that an account has negative value of sharpe ratio?

Oct 19, 2011 05:48 pm

Antworten: 939
Member since: 21/04/2011

Originally posted by Sasha

Is it possible that an account has negative value of sharpe ratio?

Yes. Sharpe ratio can have negative value. As u can see in the case of following real accounts on fxstat.

http://www.fxstat.com/performances/view/Free_Signals_from_DeltaFins-3352
http://www.fxstat.com/performances/view/testing_account_not_for_follow-5341

Oct 23, 2011 01:22 am
illiterate User

Antworten: 561
Member since: 21/04/2011

Originally posted by Sasha
Is it possible that an account has negative value of sharpe ratio?

Sharpe ratio will be negative in case of loss.

Apr 25, 2012 05:34 pm
mrinalini User

Antworten: 177
Member since: 12/04/2012

Sharp ratio will be positive in case of profits and negative in case of loss. Thanks a lot for this thread and now we know what sharp ratio is all about .

Apr 27, 2012 05:22 am
FXlord User

Antworten: 75
Member since: 07/04/2012

Ok, I understand!

Thank you for sharing that with us, it's really informative!

Dec 19, 2012 05:30 am
Jogi User

Antworten: 685
Member since: 06/06/2011

Originally posted by LumenCapital

Now, FxStat understands that every one of us has different criteria. Everyone of us may need to compare the same performance with different bonds/stocks or simple bank interest. That is why FxStat made the risk-free equal to 1%. This means that you just need to multiply he Sharp ratio with your risk-free ratio. For example; if FxStat is showing a sharp ratio of 1.5% and your risk-free ratio is 3%. Then, your Sharp ratio is 1.5 X 3 = 4.5%.

The multiplication does not make sense.

Say I have a risk-free investment of 0.1% per month compared to the default 1% FXSTAT uses in the calculation, this in fact means my system will actually have a LOWER Sharpe Ratio then when I use the default 1%, while in fact my system far outperforms the default risk-free rate.

Yea, valid point. I am also confused about multiplication. with 0.1% riskfree rate, sharpe ratio should increase. Similarly with higher risk free rate, sharpe ratio should decrease.

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