- The Sharpe ratio explains whether returns are due to an investor's excess risk or responsible investing. In other words, it allows you to determine how much excess return you receive for the risk you take in investing.
- A good investment is defined not by simply reaping higher returns but by the higher returns not containing added risk. An investor must make sure they are compensated for each risk they take when not having a risk-free asset. The Sharpe ratio allows them to forecast this.
- If the Sharpe ratio is negative, this would indicate that a risk-less asset would be a better option than an analyzed security. According to Terry W. Young warns that the Sharpe ratio can be altered because of the frequent changes in the value of risk-free money.
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