The SHR Calculator helps investors evaluate the risk-adjusted return of their investment portfolios. It does this by calculating the Sharpe Ratio, which compares the return of the portfolio to the risk-free rate of return, while taking into account the portfolio’s volatility. This ratio provides a clear picture of whether the returns are due to smart investment decisions or excessive risk-taking.
The Formula of SHR Calculator
The formula for calculating the Sharpe Ratio is:
Where:
- Rp is the return of the portfolio
- Rf is the risk-free rate of return
- σp is the standard deviation of the portfolio’s excess return
To calculate the Sharpe Ratio:
- Determine the portfolio return (Rp).
- Determine the risk-free rate (Rf).
- Calculate the excess return by subtracting the risk-free rate from the portfolio return (Rp – Rf).
- Calculate the standard deviation of the portfolio’s excess return (σp).
- Divide the excess return by the standard deviation to get the Sharpe Ratio.
General Terms and Calculator Table
Here is a table of common search terms related to the Sharpe Ratio, along with pre-calculated Sharpe Ratios for different scenarios. This table can help users quickly find the information they need without performing the calculations themselves.
| Portfolio Return (Rp) | Risk-Free Rate (Rf) | Standard Deviation (σp) | Sharpe Ratio (SHR) |
|---|---|---|---|
| 10% | 2% | 8% | 1.00 |
| 15% | 3% | 10% | 1.20 |
| 20% | 4% | 12% | 1.33 |
| 25% | 5% | 15% | 1.33 |
| 30% | 5% | 20% | 1.25 |
Example of SHR Calculator
Let’s walk through an example to illustrate the use of the SHR Calculator. Suppose you have a portfolio with a return (Rp) of 12%, a risk-free rate (Rf) of 3%, and a standard deviation (σp) of 9%.
- Calculate the excess return: Rp – Rf = 12% – 3% = 9%
- Calculate the Sharpe Ratio: SHR = 9% / 9% = 1.00
In this example, the Sharpe Ratio is 1.00, indicating that the portfolio’s return is one unit of return per unit of risk.
Most Common FAQs
The Sharpe Ratio is significant because it provides a measure of the risk-adjusted return of an investment. A higher Sharpe Ratio indicates that the portfolio is providing higher returns for each unit of risk, making it a valuable tool for comparing different investments.
It is advisable to calculate the Sharpe Ratio periodically, such as quarterly or annually, to assess the performance of your investment portfolio over time. Regular calculation helps in making informed decisions and adjusting your investment strategy as needed.
Yes, the Sharpe Ratio can be negative. A negative Sharpe Ratio indicates that the portfolio’s return is less than the risk-free rate, suggesting that the investment is underperforming relative to a risk-free asset.