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# Sharp ratio

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Jan 29, 2011 09:41 am
#1

Postagens: 75
Membro desde: 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

Postagens: 513
Membro desde: 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

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Membro desde: 16/05/2011

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

Oct 19, 2011 05:48 pm

Postagens: 939
Membro desde: 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

Stick to your rules

Oct 23, 2011 01:22 am
illiterate User

Postagens: 561
Membro desde: 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

Postagens: 177
Membro desde: 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

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Membro desde: 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

Postagens: 685
Membro desde: 06/06/2011

Originally posted by LumenCapital

Originally posted by paradise
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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