I probably knew what this was once but have forgotten. Refresh my memory please.

The Sharpe Ratio, named after Nobel laureate William F. Sharpe, measures the rate of return in association with the level of risk used to obtain that rate. It's a particularly useful tool for novice investors to use as a method tracking "luck" versus "smarts". Here's an easy example to help conceptualize how the Sharpe Ratio works in real life. You and your two friends are out for a drink when the topic turns to investing. Friend number one is the play it safe guy who puts his money in Treasury Bonds and hopes for the best. Essentially his investment is as close to risk free as possible (excluding the threat of inflation of course). It's safe and requires nothing more than automatic payroll deductions to generate a steady - albeit decidedly insignificant - rate of return. This is considered a "risk free" rate. Since anyone can obtain that rate of return by doing almost nothing, it is removed from the equation. Stocks, by their very nature, have some element of risk and as a rule of thumb, any investment with an element of risk should generate a premium above the risk free level...otherwise, why put your money at stake? Friend number two is telling you about his hot new investment tip that just generated an amazing 25 percent rate or return. Is this guy a genius or what? Maybe not. By using the Sharpe Ratio, you can measure whether your friend is taking on too much risk. Briefly, it works like this... Subtract the risk free rate (like that available from your friends Treasury bills) from the rate of return generated then divide by the standard deviation of the portfolio returns. The result provides a way to measure the excess return derived from the level of risk assumed...not necessarily insight and intuition. Chances are your friend isn't a genius but rather a lucky hot-shot who needs to take the money and run before his luck runs out. To give you some insight, a ratio of 1 or better is considered good, 2 and better is very good, and 3 and better is considered excellent. One final note: if your investment portfolio isn't performing above the risk free rate then it's time to put up or shut up. Either figure out what you are doing wrong and begin educating yourself on the basics of investing or sign up for those bonds via payroll deduction and hope inflation leaves you a little to live on by retirement.

Above is an article copied and pasted from Wallstreet University explaining sharpe ratio not my wording.

if you can look it up and i can look it up so are we the few who know how to "google it". I can understand that the foreigners not having good use of english would probably not understand what it means to "google it"

....And where does this come from? ___________________________________________________________________________________________________________________________

Ghost Rider:

if you can look it up and i can look it up so are we the few who know how to "google it". I can understand that the foreigners not having good use of english would probably not understand what it means to "google it"

It's a good thing this site does the calculation, at least for me. Figuring standard deviations is a bit beyond my mathematical ability. The concept I have no problem understanding, but being sure I haven't botched the calculation is another matter.

Does this number become more reliable the longer you stay with the approach you're using? My portfolios have negative ratios to date but if I understand statistics as well as I think I do their newness is not helping any. Insufficient data is the applicable phrase, I believe.

If the approach you are using is making profit then your sharpe ratio should improve if it is not then it won't.

Seti03:

....And where does this come from? ___________________________________________________________________________________________________________________________

Ghost Rider:

if you can look it up and i can look it up so are we the few who know how to "google it". I can understand that the foreigners not having good use of english would probably not understand what it means to "google it"

====================================================================================== where it comes from is those Eastern Europeans that just want to spam and infect everyones computers.let alone all the chinese communist party members that want to take over the world.

Ghost Rider the spammers on here are just a few signing up under different names , not good to mass auto condemn because of a few, and I don't have a clue about the chinese communist party members you are referring to.

I am testing different approaches with each of my portfolios, which seems to me to be the main point of virtual portfolios. If I'm interpreting what I've read correctly, the one with the highest Sharpe Ratio should be the most profitable long-term. Is that right or wrong?

That is the way I understand it.

That is the way I understand it.