Chapter 5, Problem 2PS

Summary Introduction

To explain:

Why an investor uses the difference between the simple average rate of return and the T-bill rate and not the geometric average rate, while estimating sharpe ratio of a portfolio from a history of asset returns.

Introduction:

Sharpe ratio is commonly used to measure risk adjusted return for an investor on a particular portfolio. Sharpe ratio is used for ranking different portfolios on the basis of risk return trade off. It helps an investor to understand the risk associated with per unit of return.