Connect with us


Phuket Business: Calculating the Sharpe ratio



PHUKET: One statistic you will often see when looking at a fund’s performance is the “Sharpe ratio”.

This is an attempt to quantify the excess return for a given level of risk. For example, two funds may both return 12%. If one returns a steady 1% every month while the other swings up and down, common sense and our blood pressure readings both tell us the first fund is better.

But it gets tricky if one fund returns 9% and another returns 13% with a higher level of volatility. The Sharpe ratio is an attempt to quantitatively compare which one gives “more bang for your buck” in terms of stomaching risk.

To quickly estimate a Sharpe ratio, subtract a benchmark “risk free” long term average rate, such as what a government bond pays; let’s assume 3.5%, (even though that seems like a dream in today’s markets). Take the return of the investment you are looking at and divide by its annual volatility.

So, a fund such as Axiom, to give an extreme positive example, returns about 12%. Subtract from this the 3.5% risk free yield to get an excess return of 8.5%. Then, divide this by the fund’s annual volatility of 1% to get an amazing Sharpe ratio of about 8.5.

As a guide post, one could substitute in the longer term return of the S&P 500 as 10%. Assume the risk-free return is 1%, and the average standard deviation of the S&P 500 is about 16%. Doing the math, we find that the average, long-term Sharpe Ratio of the US market is about 0.4 = ((10%-3.5%)/16%).

The Sharpe ratio of the Winton trend following fund, which is a very consistent market-based fund, is about 8. This fund essentially gives twice the return per unit of risk when compared to a diversified US stock market investment.

The main problems involved with the Sharpe ratio are that it is backwards-looking and ignores the negative effects of highly-correlated negative returns, or very large future negative returns, which are terms for the total failure of a fund.

If a strategy produces great results, right up until a rare event causes a blow-up, such as the famous Long Term Capital Management crisis caused by the Russian default, the Sharpe ratio will look great beforehand and have no predictive value to help avoid the enormous loss about to be suffered.

One needs to look at the entire picture when considering investments, and in my opinion the Sharpe ratio is an excellent “relative” tool. This means it helps look at how funds have performed in the past, relative to each other, but it does not help predict if a fund will get into trouble in the future.

This is an extremely important distinction that you must never forget. You always need to consider as many possible future scenarios as you can, no matter how unlikely, and try to determine how the funds in your portfolio would be affected by these scenarios.

Nobody has a crystal ball, but if you understand what situations might negatively affect a fund you hold, then you can be on the lookout and get out if there are any signs of trouble.

David Mayes MBA lives in Phuket and provides wealth management services to expats around the globe, focusing on UK pension transfers. He can be reached at
085-335 8573 or

— David Mayes


Get more from The Thaiger

Join the conversation and have your say on Thailand news published on The Thaiger.

Thaiger Talk is our new Thaiger Community where you can join the discussion on everything happening in Thailand right now.

Please note that articles are not posted to the forum instantly and can take up to 20 min before being visible. Click for more information and the Thaiger Talk Guidelines.

Archiving articles from the Phuket Gazette circa 1998 - 2017. View the Phuket Gazette online archive and Digital Gazette PDF Prints.

Follow Thaiger by email:

World25 mins ago

Suicide bombing in Afghanistan hits students preparing for exam

Politics1 hour ago

BREAKING: Prayut reinstated as Prime Minister of Thailand

Technology1 hour ago

What role for Thailand in China’s great European EV invasion?

Sponsored7 hours ago

10 Best Seed Banks that Ship Cannabis Seeds Discreetly to You (Free US Shipping)

Cambodia1 hour ago

Cambodian delegation in UK to seach for stolen treasures

Thailand2 hours ago

20 baht notes printed with errors, says Bank of Thailand

Crime2 hours ago

Loan shark bombs debtor’s house in southern Thailand

Join the conversation on the Thaiger Talk forums today!
Thailand3 hours ago

Thai researchers develop flood-resistant rice strain

Press Room3 hours ago

Southeast Asia’s hospitality leaders step into the ring to fight for sustainability at PHIST 5

Crime3 hours ago

Horrified relatives attempt ID of disfigured suitcase victim

Travel3 hours ago

Things to do in Bangkok that cost next to nothing (2022)

Travel4 hours ago

5 best spa treatments in Bangkok to pamper yourself this September – October

Phuket4 hours ago

Phuket’s governor Narong braces for storm Noru

Politics4 hours ago

Royal defamation case dropped against Thai activist

Myanmar5 hours ago

OnlyFans star sentenced to six years in prison in Myanmar

Protests5 hours ago

Activists plan protests across Bangkok

Thailand1 year ago

Morning Top Stories Thailand | Police to end protests, Human Trafficking | September 14

Thailand2 years ago

Thailand News Today | Thai Airways in rehab, All go for Songkran | March 4

Tourism2 years ago

Phuket’s nightlife. Yes, bars and clubs are still open | VIDEO

Phuket2 years ago

Thailand News Today | Covid passport talks, Thai Airways heads to court | March 2

Tourism2 years ago

Phuket Thai food treats you need to try | VIDEO

Thailand2 years ago

Thailand News Today | Bars, pubs and restaurants ‘sort of’ back to normal | Feb 23

Tourism2 years ago

In search of Cat & Dog Cafés in Phuket Town | VIDEO

Thailand2 years ago

Thailand News Today | Gambling crackdown, Seafood market to reopen, Vlogger challenge | Jan 21

Thailand2 years ago

Thailand News Today | Covid testing for visas, Business impact, Vaccine approval | January 19

Thailand2 years ago

Thailand News Today | Weekend Bangkok bombs, Thailand fires, Covid update | January 18

Thailand2 years ago

Thailand News Today | Stray car on runway, Indonesian quake, 300 baht tourist fee | January 15

Thailand2 years ago

Thailand News Today | Governor off respirator, sex-trafficking arrest, condo prices falling | January 14

Thailand2 years ago

Thailand News Today | Chinese vaccine, Thailand ‘drug hub’, Covid update | January 13

Thailand2 years ago

Thailand News Today | Bangkok may ease restrictions, Phuket bar curfew, Vaccine roll out | January 12

Thailand2 years ago

Thailand News Today | Covid latest, Cockfights closed down, Bryde’s Whale beached | January 11