The Sharpe ratio measures the returns on an Account, in comparison to the risk taken to achieve those returns. It informs on the excess returns earned over and above a risk-free rate (best risk-free alternative to investing such as holding cash). SAXO BANK uses a risk-free rate of zero and calculates Sharpe Ratio for a period of at least 6 months. As the Sharpe ratio is a reward-to-risk ratio, the Account performance is risk-adjusted. This means that the excess returns earned over the risk-free rate are measured in relation to the risk (standard deviation) of the Account. The Sharpe ratio is calculated as:
Assume a realised return of 6% and a risk-free rate of 0%, with a standard deviation of 4.04%. The Sharpe ratio for the period is:
A high Sharpe ratio (above or equal to 1.0) indicates that the returns for the period were high (or 'good') relative to the risk taken in the period.