SHARPE RATIO

Another name of Sharpe ratio is the Sharpe measure or Sharpe index or reward to variability. This ratio can be calculated as excessive return per risky unit in an investment strategy in online stock trades. This ratio is names after the William Sharpe. Mathematically it can expressed as
S = R - Rf   =    E (R - Rf)  .
          σ           var (R - Rf )
R is known as return on asset in online stock trades
Rf the return calculated on benchmark asset in online stock trades
E (R - Rf) is value expected over the excess return for benchmark online stock trades
σ  is the known as standard deviation for the return excess on asset in online stock trades
In the formula shown above it can be easily observed that Rf remains risk free across the period. Sharpe ratio is to decide that how much return from an asset is able to compensate with the risk taken by the investor in online stock trades. During comparison of two assets in online stock trades, expected return against the benchmark return having the higher Sharpe ratio means an investor has earn more amounts with the same risk taken previously in online stock trades. That’s why investors are given advice to select the investment with the high Sharpe ratio. It is a mathematical model so it highly relies on the data which should be correctly adopted form the online stock trade market.
Let us take an example, an asset with the expectation of return around 15 percent with the risk free rate. Another supposition can be having for about 10 percent. As the risk free return is considered as constant in online stock trades so the Sharpe ration will be about 1.5.
Sharpe ratio has an advantage that we can calculate it easily directly from the observed returns coming in series without the requirement of any further information for measuring the profitability in online stock trades. But the issue of level of risk is always associated with this ratio as it is not carefully designed because sometimes author does not take it seriously.