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Maximizing Returns: Understanding the Sharpe Ratio for Portfolio Comparison

Learn how to compare similar portfolios using the Sharpe Ratio, the key metric to measure asset performance by considering risk and return. Discover how a higher Sharpe Ratio indicates better returns relative to risk. Dive into calculating the Sharpe Ratio using the reward-to-risk ratio formula for optimal portfolio assessment.

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Maximizing Returns: Understanding the Sharpe Ratio for Portfolio Comparison

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  1. How To Compare Similar Portfolios? • daily_rets[i] = (value[i]/value[i-1]) – 1 • std_metric = stdev(daily_rets)

  2. Sharpe Ratio • Most “important” measure of asset performance. • How well does the return of an asset compensate the investor for the risk taken? • The higher the Sharpe ratio the better. • When comparing two assets each with the same return, higher Sharpe ratio gives more return for the same risk.

  3. Sharpe Ratio • Reward/Risk = How much reward are you getting for your risk? • metric = k * mean(daily_rets)/stdev(daily_rets)) • k = sqrt(250) for daily returns

  4. Example

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