Exercise

Sharpe ratios

The Sharpe ratio is a simple metric of risk adjusted return which was pioneered by William F. Sharpe. Sharpe ratio is useful to determine how much risk is being taken to achieve a certain level of return. In finance, you are always seeking ways to improve your Sharpe ratio, and the measure is very commonly quoted and used to compare investment strategies.

The original 1966 Sharpe ratio calculation is quite simple:

$$ S = \frac{ R_a - r_f }{\sigma_a} $$

  • S: Sharpe Ratio
  • \( R_a \): Asset return
  • \( r_f \): Risk-free rate of return
  • \( \sigma_a \): Asset volatility

The randomly generated portfolio is available as RandomPortfolios.

Instructions

100 XP
  • Assume a risk_free rate of 0 for this exercise.
  • Calculate the Sharpe ratio for each asset by subtracting the risk free rate from returns and then dividing by volatility.