Vad är Sharpekvot? | Nordnet Academy

Summary

The Sharpe ratio is a valuable tool for assessing the performance of a fund or portfolio relative to its risk, calculated by subtracting the risk-free rate from the return and dividing by the standard deviation to measure volatility. A ratio below 1 indicates poor returns for the risk taken, while a ratio above 1 is considered excellent. Investors should look at the Sharpe ratio over a long time horizon for a fair assessment and remember it's just one of many metrics for comparing investment options. The script also reminds investors of the inherent risks of the stock market, with no guarantees of returns.

Takeaways

• 📈 The Sharpe ratio is a measure of a fund's or portfolio's return relative to the risk taken.
• 🔢 A Sharpe ratio of minus or around 0 indicates a poor return considering the risk, while 0.5 is considered good, and above 1 is very good.
• 🧐 The Sharpe ratio is calculated by taking the yield of the fund or portfolio, subtracting the risk-free interest rate, and then dividing by the standard deviation (volatility).
• 💡 Investing should always aim for a return higher than the risk-free rate; otherwise, the Sharpe ratio would be negative, signifying a bad investment.
• 📉 A high standard deviation in the denominator lowers the Sharpe ratio, indicating high risk for the returns achieved.
• 🤔 The Sharpe ratio helps determine if the excess return is worth the risk and volatility of the investment.
• 👀 To find the Sharpe ratio, check the 'Details' section of a fund's information, where it's typically listed.
• 🕰️ It's advisable to consider the Sharpe ratio over the longest possible time horizon for a more accurate representation of a fund's performance.
• 📚 The Sharpe ratio is just one tool for comparing funds and portfolios; it's important to learn about other metrics as well.
• 🏫 For further education on the stock market, including risks and returns, the Nordnet Academy is a resource for learning more.
• ⚠️ Investing in shares and mutual funds carries the risk of not recovering the initial investment, despite historical positive returns over time.

Q & A

What is the Sharpe ratio?

The Sharpe ratio is a measure used to evaluate the performance of an investment compared to a risk-free asset, taking into account the volatility of returns. It is calculated as the difference between the returns of the investment and the risk-free rate, divided by the standard deviation of the investment's returns.

Why is the Sharpe ratio important?

The Sharpe ratio is important because it helps investors understand the return of an investment relative to the risk taken. It provides a way to compare the risk-adjusted performance of different investments.

What does a negative Sharpe ratio indicate?

A negative Sharpe ratio indicates that the investment's returns are not even compensating for the risk-free rate, suggesting that the investment is not performing well relative to the risk taken.

What is considered a good Sharpe ratio?

A Sharpe ratio of 0.5 or above is generally considered good, indicating that the investment is providing a reasonable return for the level of risk taken. A Sharpe ratio above 1 is considered very good.

How is the Sharpe ratio calculated?

The Sharpe ratio is calculated by subtracting the risk-free rate from the return of the investment or portfolio, and then dividing the result by the standard deviation of the investment's returns, which represents its volatility.

What is the risk-free interest rate in the context of the Sharpe ratio?

The risk-free interest rate is the theoretical rate of return of an investment with zero risk, often represented by government bonds or treasury bills. It serves as a benchmark for the Sharpe ratio calculation.

Why is the standard deviation used in the Sharpe ratio calculation?

The standard deviation is used in the Sharpe ratio calculation because it measures the volatility or the degree of variation of the investment's returns. It helps to quantify the risk taken in the investment.

How can investors find the Sharpe ratio of a fund or portfolio?

Investors can typically find the Sharpe ratio of a fund or portfolio by looking at the fund's details on investment platforms or financial websites, where it is often listed among other performance metrics.

What is the significance of looking at the Sharpe ratio over different time periods?

Looking at the Sharpe ratio over different time periods, such as one year, three years, or five years, provides a more comprehensive view of the investment's risk-adjusted performance over time, allowing investors to evaluate its consistency.

Why should the Sharpe ratio not be the only metric used to evaluate an investment?

The Sharpe ratio should not be the only metric used to evaluate an investment because it does not account for other factors such as the investor's risk tolerance, the investment's liquidity, or the impact of fees and taxes.

What is the Nordnet Academy, and what can one learn there?

The Nordnet Academy is an educational platform that provides information and resources about the stock exchange and investing. It can be a valuable resource for learning more about investment strategies, risk management, and financial markets.

What is the risk associated with investing in the stock market as mentioned in the transcript?

The risk associated with investing in the stock market is that, despite historical evidence of good returns over time, there are no guarantees for future returns. There is a possibility of not getting back the money invested, highlighting the inherent risk in stock market investments.

Outlines

00:00

📊 Understanding the Sharpe Ratio

The Sharpe ratio is a financial metric used to evaluate the performance of an investment compared to a risk-free asset, taking into account the volatility of returns. It's calculated by subtracting the risk-free rate from the return of the investment and then dividing by the standard deviation of the investment's returns, which represents its volatility. A negative Sharpe ratio indicates that the investment's returns are less than the risk-free rate, suggesting a poor investment. A ratio of 0.5 is considered good, while a ratio above 1 is excellent. The script explains that the Sharpe ratio helps determine if an investment's returns are worth the associated risks, and it emphasizes the importance of looking at the ratio over a long time horizon for a more accurate assessment. It also mentions that the Sharpe ratio is just one of many tools for comparing investments.

Keywords

💡Sharpe Ratio

The Sharpe ratio is a measure of risk-adjusted return, used to evaluate the performance of an investment compared to a risk-free asset, such as Treasury bills. It is defined as the difference between the returns of the investment and the risk-free rate, divided by the standard deviation of the investment's returns. In the video, the Sharpe ratio is used to determine whether a fund or portfolio is performing well in relation to the risk taken, with values above 1 considered very good.

💡Risk-Adjusted Return

Risk-adjusted return refers to the additional return an investor receives for taking on more risk than what is offered by a risk-free asset. The Sharpe ratio is an example of a risk-adjusted performance measure. The video explains that a positive Sharpe ratio indicates that the investment's return is higher than the risk-free rate, accounting for the risk taken.

💡Fund

A fund in the context of the video refers to an investment vehicle that pools money from multiple investors to invest in a diversified portfolio of assets. The Sharpe ratio is used to evaluate the performance of these funds, as mentioned in the script where it is suggested to check the Sharpe ratio to see if a fund does well or poorly relative to the risk level.

💡Portfolio

A portfolio is a collection of financial assets such as stocks, bonds, commodities, cash, and cash equivalents, as well as fund shares, which may be held by an individual investor or a financial entity. The video discusses calculating the Sharpe ratio for a portfolio to measure its performance in terms of risk and return.

💡Risk-Free Interest Rate

The risk-free interest rate is the theoretical rate of return of an investment with zero risk of financial loss. In the video, it is used as a benchmark to compare with the returns of the investment being evaluated. If the investment's return is lower than this rate, the Sharpe ratio would be negative, indicating a poor performance.

💡Standard Deviation

Standard deviation is a measure of the amount of variation or dispersion of a set of values. In finance, it is often used to quantify the risk of an investment. The video explains that the Sharpe ratio divides the excess return by the standard deviation to account for the portfolio's volatility.

💡Volatility

Volatility refers to the degree of variation of a trading price series over time. In the context of the video, it is used to describe how much a portfolio's value fluctuates, which is a key component in calculating the Sharpe ratio to understand the risk associated with the investment.

💡Yield

Yield in finance refers to the income generated on an investment, such as interest or dividends. The video script mentions taking the yield for the fund or portfolio and subtracting the risk-free interest rate as part of the Sharpe ratio calculation.

💡Excess Return

Excess return is the additional return achieved by an investment compared to the return of a benchmark or the risk-free rate. In the video, excess return is calculated by subtracting the risk-free interest rate from the fund or portfolio's yield, which is then used in the Sharpe ratio formula.

💡Investment Performance

Investment performance is the measure of the returns generated by an investment. The video's main theme revolves around evaluating investment performance through the Sharpe ratio, which assesses how well a fund or portfolio has performed relative to the risk taken.

💡Nordnet Academy

Nordnet Academy is mentioned in the video as a resource for learning more about the stock exchange. It is an educational platform that provides information and courses to help investors understand financial markets and investment strategies.

Highlights

The Sharpe ratio is a method to measure a fund's or portfolio's return relative to the risk taken.

A negative or near-zero Sharpe ratio indicates a poor return considering the risk.

A Sharpe ratio of 0.5 or higher is considered good.

A Sharpe ratio above 1 is very good, signifying high returns for the risk taken.

The Sharpe ratio is calculated by taking the fund's yield minus the risk-free interest rate, then dividing by the standard deviation.

The risk-free rate is the minimum return expected from an investment without risk.

Investments should ideally yield more than the risk-free rate to be considered worthwhile.

A negative Sharpe ratio suggests the investment return is less than the risk-free rate.

The standard deviation in the Sharpe ratio formula measures the portfolio's volatility.

A high standard deviation can result in a low Sharpe ratio, indicating high risk for little return.

The Sharpe ratio compares the excess return against the risk-free rate to the fund's or portfolio's volatility.

To find the Sharpe ratio, check the fund's 'Details' page where it is usually displayed.

A fund's Sharpe ratio can be found for different time horizons like one, three, or five years.

It's recommended to look at the longest time horizon available for a fair representation of the Sharpe ratio.

The Sharpe ratio is one of many tools for comparing funds and portfolios.

Investors can learn more about the stock exchange and Sharpe ratio at the Nordnet Academy.

The stock market's historical returns do not guarantee future results, and there is a risk of losing the invested capital.

Transcripts

What is the Sharpe ratio, and how can you use it?

It is a very good way

to measure a fund's or a portfolio's return

in terms of the risk taken.

But let's go through it.

Because basically,

it's pretty simple.

You just find out:

Is this a fund that does well

or poorly relative to the risk level?

Then you can check the Sharpe ratio.

And should it be,

now it's the Sharpe ratio,

it will be a number.

Should that figure be minus

or around 0

, then it is not a good Sharpe ratio, that is,

the profit, the return

is not very good considering the risk taken.

0.5 or so,

then it's good.

And anything above 1 is very good.

But what exactly is the Sharpe ratio?

I'll go through this a little bit quickly first

and then I'll go back and explain.

But basically,

you calculate like this.

You take the yield for the fund or portfolio

minus the risk-free interest rate.

Then divide it by the standard deviation.

and this is how much the portfolio swings,

the volatility.

And then we get the Sharpe ratio.

If we ponder this a little more

, one wonders, what is this top

return minus the risk-free interest rate.

When you invest in anything,

it should return more than the risk-free rate.

If the risk-free interest rate is 2%,

then I can save and get a 2% return completely risk-free.

Anything I invest in besides this

has to have a higher return than 2%

or it's pointless.

If there is something else that has a little more risk

and returns less than 2%

then there is no point in having it.

You should only invest in something

that gives a higher return

than the risk-free rate.

And therefore if this return

were to be lower than the risk-free rate,

the Sharpe ratio would be negative.

And therefore it was the case that

if the Sharpe ratio was negative, negative,

then it was a bad Sharpe ratio.

So is it positive

Then it means that at least the yield is

higher than the risk-free interest rate.

Then it is divided by the standard deviation,

and I will not go through the details of

how the standard deviation works.

But this measures

how much the portfolio fluctuates.

Is it something that has

a slightly better return

than the risk-free interest

but where the portfolio fluctuates a lot

so there is a lot of risk

and it goes up and down and so on,

but then it is not really worth that risk.

Then the Sharpe ratio will be very low.

And purely mathematically

it is because

the standard deviation is high, as in the denominator.

Long story short, the Sharpe ratio is

the excess return against the risk-free rate

divided by how much the fund or portfolio

moves up and down.

How to find the Sharpe ratio?

The easiest is to go into

whatever it is, take this fund.

Then click on "Details".

And then you come to this page.

And here on the right, down there

you will find the Sharpe ratio.

In this case it was at 1.61 in one year.

Now this is a new fund,

had it been a slightly older fund we would have had a

Sharpe ratio of three years, and a Sharpe ratio of five years.

And my tip is to look at

as long a time horizon as possible.

Then it is the fairest picture

of what the Sharpe ratio is on a fund.

Just remember, Sharpe ratio is just one of the ways

to compare funds and portfolios against each other.

Now you can do this,

go to the Nordnet Academy to learn more about the stock exchange

See you there!

Good to know about risks and returns: We just want to remind you that the stock market gives and takes. Although saving in shares and mutual funds has historically given good returns over time, there are no guarantees for future returns. There is a risk that you will not get back the money you invested.