Using the Sharpe Ratio for Stocks and Portfolio Management.
You can calculate the Sharpe Ratio for a stock portfolio or individual stocks. I will show both. All calculations and definitions are from ZOONOVA First the screen image calculations.
In the calculations above there are two types of Sharpe Ratios calculated.
Sharpe
The Sharpe Ratio is a measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment. The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such calculations. The higher the Sharpe Ratio the better. In this discussion a Portfolio Sharpe Ratio has been calculated in the second image for both the Portfolio return and against the CAPM Expected Return.
C‑Sharpe
The Conditional Sharpe Ratio is defined as the ratio of expected excess return to the expected shortfall. CVaR is used as the denominator in the C-Sharpe calculation whereas the standard Sharpe ratio uses Standard Deviation as the denominator.
In the first screen image you will see the highlighted column which has the calculated output for Sharpe Ratio for the stocks listed in the grid. Next to the highlighted Sharpe column you will see two more columns that say C-Sharpe 95% and C-Sharpe 99%. These are the calculated results for Conditional Sharpe Ratio. C-Sharpe uses CVaR as the denominator in the calculation instead of the stock’s Std Deviation. CVaR is calculated under the the CVaR columns both 95% and 99%. C-Sharpe ratio shows how much potential tail risk, extreme loss, is being taken on in relationship to the Expected Return of the stock investment.
In the second image you can see under the Portfolio Optimization window at the top middle of the page the Stock Portfolio ouput for the Sharpe Ratio against the current portfolio return (ROI) and the Sharpe Ratio against the Capital Asset Pricing Model (CAPM) expected return (RoR). The higher the ratio the better for the return versus risk of the Portfolio.
Cheers.
