Many asset managers may be more concerned with potential downside when making investment decisions, which is where the Sortino ratio comes into play.īoth are set up similarly, and a larger ratio is deemed desirable in both circumstances. It is just as crucial to avoid losing money as it is to make money. Mutual fund A may be regarded as the better investment although returning less on average. In this manner, investors may see the excess returns they can expect in exchange for each unit of risk. Mutual fund B returned 13% but had a standard deviation of 11.75, resulting in a Sharpe ratio of 0.9.Īny ratio greater than one is regarded as good, with 2 to 3 being excellent and anything greater than that a superb bet.We derive a Sharpe ratio of 1.3 by subtracting the risk-free rate of 2.5 percent and dividing it by the standard deviation of 5. The mutual fund A yielded a 9 percent return.The presence of highly concentrated data suggests lower volatility, but a wider range of data may imply increased volatility.Ī Sharpe ratio of 0 indicates that there are no returns over the risk-free rate. ![]() ![]() ![]() The standard deviation illustrates the return data distribution. Divide that figure by the asset’s standard deviation of return.
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