## The Sharpe Ratio of Unit Trust – a method to estimate its risk return profile.

In any financial investment, risk and return go in parallel. Guaranteed return is known as risk-free return, and almost always refer to either Fixed Deposit rate or Malaysian Government Securities coupon rate. If you are buying government bond such as Greece, it is no longer risk free anyway! FD rate seldom goes beyond 4%; here’s a summary of the current risk free rate of return (FD).

Sharpe ratio of an investment refers to how well the investment generates a return taking into consideration the risk. Risk is high when the investment nature has high volatility – tendency for its value to soar or to plunge excessively within a specific timeframe when benchmarked against the overall market activity.

For the mathematically inclined, the equation is as such:

Sharpe ratio for Investment Z = (Investment return for Z – Risk Free Rate of Return) / Standard Deviation for Investment Z

High volatility = High Standard Deviation

Sharpe ratio –> Higher is better.

Taking Risk Free Rate of Return as constant, 2 factors contribute to higher Sharpe ratio

- Higher investment return
- Lower volatility

## This Post Has 2 Comments

## Michael Tsen

5 Oct 2011quite a few years back, I did an analysis showing KidSave was great too. Its amazing its still doing ok now.

This analysis is a point to point assessment, meaning buy at one time and sell at another. If you shift the buy sell period by 1 month, 3 months or even just 1 week sometimes, it 'may' significantly affect these technical parameters.

Further more, if you practice DCA, then this analysis may not be an apple to apple comparison.

But still a very impressive analysis 🙂