Sharpe Ratio

What does one desire from one's investments? The obvious answer seems to be returns. And not just any returns but the higher the better. While an investor seeks to generate high returns the question arises, how high? Though the sky can be the limit, usually one asks for returns, which are higher than those, which we are normally accustomed to. These are returns from risk-less instruments like treasury bills, government securities or bank savings deposits. So the aim of investing seems to be to generate returns in excess of the risk free return. And in order to generate these higher returns we are willing to take risks. At the same times high returns are generally associated with a high degree of volatility. We accept this volatility only because we want higher returns. Th

This article was originally published on February 27, 2003.