Sharpe Ratio(Sharpe Ratio) Beginner's Guide
The Sharpe Ratio measures the excess return earned by an investment for each unit of risk undertaken. It is suitable for comparing the risk-adjusted performance of different assets or strategies, but should not be used as the sole basis for investment decisions.
What it measures
Sharpe Ratio It connects the return of an asset or investment portfolio with the risk undertaken: a higher value generally indicates more excess return per unit of risk. However, a high ratio does not guarantee future performance; assessing whether a value is favorable should also involve comparisons with similar assets, peer portfolios, or market sectors.
Calculation Method
The formula is Sharpe Ratio= (Rp - Rf) / Sigma p. Here, Rp is the actual or expected return of the asset or portfolio, Rf is the risk-free rate, and Sigma p is the standard deviation of the excess return. Subtract Rf from Rp to obtain the excess return, then divide by the degree of volatility to estimate the additional return corresponding to each unit of risk.
Example and interpretation
If a portfolio's 1 annual return is 15%, the risk-free rate is 3%, and the return's standard deviation is 12%, then the ratio is (15%-3%）/12%=1.0, indicating that each unit of risk undertaken yields one unit of excess return. Evidence states that 1 to 1.99 is generally considered “good,” but the level of similar portfolios should still be taken into account.
Uses and limitations in the crypto market
Crypto-asset prices exhibit significant Volatility,Sharpe Ratio which can be used to compare assets or strategies with similar returns but different volatility, generally favoring those with lower risk. It assumes that returns are approximately normally distributed, which may not hold for highly volatile assets; negative values are also more difficult to interpret. Therefore, it should be used together with other risk-management tools.
Original Tutorial
https://www.binance.com/en/academy/glossary/sharpe-ratio
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