Question

explain what it meant by a sharpe ratio of 3. Does this ratio differ from one asset to another? explain why or why not

Answer 1

Sharpe ratio of 3 means measures the return your asset or portfolio earns above the risk free rate for per unit of risk taken. Hence, sharpe ratio of 3 means that you are earning an extra return above risk free rate of 3 per unit of risk taken.

Sharpe ratio is calculated as -

Return on portfolio - risk free rate/ standard deviation of portfolio

This means that every asset will have a different sharpe ratio.

As the asset changes, even though the risk free rate remains the same, the return on asset/ portfolio and standard deviation of asset/ portfolio will differ. This change is return and standard deviation causes different assets to have different sharpe ratio.