Key takeaways
- The Sharpe ratio sets your return against the risk taken (the volatility).
- It answers: how much return do you get per unit of fluctuation? Higher is better.
- Talantor calculates it without a risk-free rate (rf = 0), so the metric shows the pure return per risk.
What is the Sharpe ratio?
Return alone says little as long as you do not know how much risk it took. Two portfolios with the same return are not equally good if one ran smoothly and the other was a roller-coaster ride. This is exactly where the Sharpe ratio comes in: it divides the excess return (the return above the risk-free rate) by the volatility.
The result is a ratio. The higher it is, the more return your portfolio has generated per unit of fluctuation - in other words, the more efficiently the risk was used.
How to read it
As a rough guide: values around 1 are decent, clearly above that very good, and negative values mean the risk did not pay off over the period under review. Because the metric depends heavily on the period, comparing it over time or between strategies tells you more than a single absolute value.
How Talantor calculates it
Talantor derives the annualised return and the annualised volatility from your real time-weighted history and divides one by the other. The risk-free rate is set to 0 - so the metric measures the full return per risk, without assuming a current instant-access savings rate, which changes constantly anyway.
Sharpe penalises gains too
Because the denominator contains the total volatility, strong upward price jumps also lower the Sharpe ratio. If you only want to look at downside risk, also check the Sortino ratio.