 # How to calculate Sharp's coefficient

Investment of money is carried out for the purpose of obtaining the corresponding economic effect. Special statistical coefficients are widely applied to assessment of efficiency of investments. The most widespread is the indicator which formula of calculation is developed by the Nobel Prize laureate Bill Sharp.

## It is required to you

• - calculator.

## Instruction

1. Sharp's coefficient characterizes efficiency of a combination of profitability and risk probabilitiesof variability at management of the investment portfolio. It reflects its profitability received over a risk-free rate taking into account systematic and not systematic risk. Than this indicator is higher, especially portfolio management or fund is qualitatively exercised.

2. There are calculation many options, but all of them can be presented in a general view: Sharp's coefficient = (profitability – risk-free profitability) / a standard deviation of profitability. It is measured as in monetary units, and as a percentage. It is recommended to use values for the period equal to one year, then calculations will be the most exact.

3. Let's consider in more detail some elements of a formula. The first represents that part of money which the investor earns from the invested assets.

4. It is necessary to carry that sum which is expected to be earned from so-called risk-free assets to risk-free. It is presented by a rate on the state securities.

5. The standard deviation in this case represents fluctuations of results of a portfolio concerning its average profitability. They can be both positive, and negative. This indicator means risk which is inherent in this investment or fund. What considerably complicates definition efficiency because with other things being equal Sharp's coefficient can be identical at portfolios with negative and positive profitability.

6. If the investor invests money in risk-free assets, then in this case the coefficient accepts the value equal to zero. Portfolios which cannot bring even the minimum income will have negative value of this indicator. Positive it will be at excess of profitability of the minimum rate on the state securities.

7. This coefficient is the fine instrument of comparison of profitability and risk of various options of portfolio management or fund. But in case of comparison of alternative forms of an investment it is expedient to use it in a complex with other indicators.

Author: «MirrorInfo» Dream Team