# 8. The Sharpe Measure of Risk-Adjusted Performance

## i. calculate and interpret the coefficient of variation and the Sharpe ratio;

What is the Sharpe measure of risk-adjusted performance? It is a return risk measure that is more precise than standard deviation which measures the reward to total volatility trade-off.

What is the mathematical formula for the Sharpe Measure?
\(\frac{r_p - r_f}{\sigma_p}\)
- `r_p`

= the mean return to a portfolio
- `r_f`

= the mean return to a risk-free asset
- `(r_p - r_f)`

= the extra reward for the added risk taken, called the excess return
- `\sigma_p`

= the standard deviation of the portfolio returns

What is another term for the Sharpe Measure? It is also called the reward-to-variability ratio

Do investors prefer to see a larger Sharpe Ratio or a smaller one? Why? Portfolios with large Sharpe ratios are preferred to those with smaller ratios because we assume that investors prefer return and dislike risk.

##### Source:

CFA

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- 115.020.20 Reading 7 - Statistical Concepts and Market Returns to 115.020.20.08 Reading 7 - 8. The Sharpe Measure of Risk-Adjusted Performance