The Sharpe Ratio

Filed in archive Investing on July 30, 2008

My colleague at HedgeCo, Aaron Wormus, does a really good job here at what probably is the most complete (and simplest) description of the Sharpe ratio."Explaining the Sharpe Ratio (again)"

He states, "One of the issues that we have with statistics is that regardless of how close we stick to any given standard we find someone who interprets something differently and gets different results. Often others "tweak" the algorithm simply out of a misunderstanding of the algorithm, other times as we will discuss later, choosing an alternate calculation intentionally creates better results."

The Sharpe ratio is one of the simplest ratios, it is also one of the ratios which is most often miscalculated. The blog then goes on to describe the correct way to calculate the ratio as well as a couple of the most common errors made when performing this calculation.