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SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT
SHARPEN INDEX MODEL
By Jissmol George

SHARPEN INDEX MODEL
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The Sharpe index is a measure in which the performance of portfolio in a given period of time is measured.
In Sharpe index, three things must be known:
 the portfolio return,
 the risk free rate of return - use the average return
(over the given period of time).
 the standard deviation of the portfolio – it is measure the systematic risk of the portfolio.
The ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset
Properly compensated for the additional risk you take for not holding a risk-free asset

CONDITIONS
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Return (rp):
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The returns measured can be of any frequency (i.e. daily, weekly, monthly or annually), as long as they are normally distributed, as the returns can always be annualized. Herein lies the underlying weakness of the ratio - not all asset returns are normally distributed.

Risk-Free Rate of Return (rf ):
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The risk-free rate of return is used to see if the investors are properly compensated for the additional risk taken on with the risky asset.
Traditionally, the risk-free rate of return is the shortest dated government T-bill .
While this type of security will have the least volatility

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Standard Deviation (StdDev(x)):
 First calculate the excess return from subtracting the return of the risky asset from the risk-free rate of return,
 Next need to divide this by the standard deviation of the risky asset being measured.
 As mentioned above, the higher the number, the better the investment looks from a risk/return perspective. CALCULATION
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The Sharpe index is computed by dividing the risk premium of the portfolio by its standard deviation or total risk.

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Symbolically, the Sharpe index is presented as:

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Here,

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= portfolio rate of return f