The Sharpe Ratio

Hedge funds traditionally use benchmarks like the Sharpe Ratio and Sortino Ratio to gauge the risk-efficiency of portfolios. The Sharpe Ratio is the effective return of a risky asset per unit of risk (i.e variance), while the Sortino Ratio is the effect return of a risky asset per unit of downside risk. The higher the numerical value of both these ratio, the more risk efficient a portfolio is said to be.


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