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.
This is a part of the course
“Introduction to Portfolio Risk Management in Python”
Exercise instructions
- Assume a
risk_freerate 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.
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
# Risk free rate
risk_free = ____
# Calculate the Sharpe Ratio for each asset
RandomPortfolios['Sharpe'] = ____
# Print the range of Sharpe ratios
print(RandomPortfolios['Sharpe'].describe()[['min', 'max']])This exercise is part of the course
Introduction to Portfolio Risk Management in Python
Evaluate portfolio risk and returns, construct market-cap weighted equity portfolios and learn how to forecast and hedge market risk via scenario generation.
Level up your understanding of investing by constructing portfolios of assets to enhance your risk-adjusted returns.
Exercise 1: Portfolio composition and backtestingExercise 2: Calculating portfolio returnsExercise 3: Equal weighted portfoliosExercise 4: Market-cap weighted portfoliosExercise 5: Correlation and co-varianceExercise 6: The correlation matrixExercise 7: The co-variance matrixExercise 8: Portfolio standard deviationExercise 9: Markowitz portfoliosExercise 10: The efficient frontierExercise 11: Sharpe ratiosExercise 12: The MSR portfolioExercise 13: The GMV portfolioWhat is DataCamp?
Learn the data skills you need online at your own pace—from non-coding essentials to data science and machine learning.