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:: VAMI - Monthly ROI
Month ROI VAMI
1 11.20% $1,112
2 14.90% $1,278
3 -1.50% $1,259
4 -5.10% $1,194
5 0.50% $1,200
6 9.70% $1,317
7 -1.70% $1,294
8 5.90% $1,371
9 3.90% $1,424
10 -0.50% $1,417
11 1.70% $1,441
12 3.30% $1,489
13 11.10% $1,654
14 5.20% $1,740
15 7.50% $1,870
 

Sharpe Ratio
 

The Sharpe ratio is a risk-adjusted financial measure developed by Nobel Laureate William Sharpe. Like the other risk-adjusted ratios, the Sharpe ratio compares a service's return to a specific measure of risk. In this case, the measure used is the standard deviation.

 

It is calculated by subtracting the risk-free rate of return from the service's actual return, and then dividing this figure by the standard deviation. In this way, it measures the return the service earned in excess of the risk-free rate relative to its total risk.
 
:: Formulae
Where R = service's return, Rf = the risk-free rate of return and V = service's volatility:

 

S = (R - Rf) / V

 
 
:: Definitions

The risk-free rate of return is a theoretical return you would expect to get from an investment that has zero risk. In practice, there is no such thing as a risk-free investment, as even the safest investments carry some degree of risk. That is why the interest on a 3-month U.S. Treasury bill is often used as the risk-free rate, while for our purposes we use 5.0% per annum.

 

The service's actual return is simply the average of the monthly results. When you subtract the risk-free rate from from this average, you get the return the service made in excess of that rate. Therefore, with all other things being equal, an increase in the excess return will lead to an increase in the ratio.

 

That is why an investment's Sharpe Ratio is usually seen to be improving as it increases - the higher its Sharpe ratio, the better the service's historical risk-adjusted performance. Of course, the opposite is also true. In fact, when the return is negative, it's actually indicating a negative excess return, in which case it has no significance.
 
:: Calculation

Using the results from the calculation box (again, a service's actual returns) we first calculate the average monthly return, which is 4.4%.

 

Then, we calculate the standard deviation of those monthly returns, which is 5.5%. We then select our risk-free rate of return, which is 0.42% per month.

 

The monthly Sharpe ratio, then, is:

 

(4.4 - 0.42) / 5.5 = 0.725

To annualize this, we multiply it by the square root of 12. This gives us an annual Sharpe ratio for this particular service of 2.51.