What is Sharpe Ratio?
Let's find out Sharpe Ratio meaning, definition in crypto, what is Sharpe Ratio, and all other detailed facts.
The Sharpe ratio (also known as the Sharpe measure, reward-to-variability ratio, or Sharpe index) was created by William F. Sharpe in 1966. It’s used to determine the Return on Investment (ROI). The Sharpe ratio compares possible gains to the risks.
To put it simply, the Sharpe ratio suggests whether you should take a risk with an investment or not. However, from the more technical side, it’s a measure of the average ROI. Though only in the case when ROI exceeds the harmless rate per unit of deviation of a specific asset.
Thus, when two assets are evaluated based on their Sharpe ratio, the asset with the greater ratio is deemed better. This implies that the asset has a higher potential for profit in relation to the risks. Thus, an investment strategy is more appealing when it has a higher Sharpe ratio.
However, note that negative values of the Sharpe ratio aren't very useful. This is because the calculation of the Sharpe ratio can get close to 0 when the returns are rising regularly or there is too much volatility.
The Sharpe ratio is used by various banks and large fund managers. They combine it with other techniques to evaluate portfolio performance. In addition, the Sharpe ratio can be used to analyze financial markets (e.g., the stock market).
Though keep in mind that Ponzi schemes can also have a high Sharpe ratio. However, Ponzi scheme data is deceptive and doesn’t show the actual returns. Thus, always check if the data is accurate before using the Sharpe ration.