The Sharpe Ratio and Risk Adjusted Performance

The Sharpe ratio is a measure of risk-adjusted performance that indicates the level of excess return per unit of risk in a Forex Funds returns. In calculating the Sharpe ratio, the excess return is the return over and above the short-term, risk-free rate of return, and this figure is divided by the risk, which is represented by the annualized volatility or standard deviation.

Sharpe Ratio = (Rp – Rf)/ σp

In summary, the Sharpe Ratio is equal to the compound annual rate of return minus the return rate on a risk–free investment divided by the annualized monthly standard deviation. The higher the Sharpe ratio, the higher the risk-adjusted return. If 10-year Treasury bonds yield 2%, and two Forex managed account programs have the same performance at the end of each month, the Forex managed account program with the lowest intra-month P&L volatility will have the higher sharpe ratio.

Risk graph with dollar sign being cupped by a man's hands.

The Sharpe Ratio is an important risk management metric for investors to understand.

The Sharpe Ratio is most often used to measure past performance; however, it can also be used to measure future currency fund returns if projected returns and the risk free rate of return are available.