DEFINITION of 'Modified Sharpe Ratio'
A ratio used to calculate the riskadjusted performance of an asset or a business strategy. The modified Sharpe ratio is a version of the original Sharpe ratio amended to include skewed/abnormal data. It is calculated by dividing the excess returns by the modified value at risk.
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BREAKING DOWN 'Modified Sharpe Ratio'
A higher return for a given level of risk can be expected from the investment with the higher modified Sharpe ratio. An investment may appear to yield higher returns, making it more desirable; however, the investment may be unstable and simply reflecting a highrisk result. The ratio is useful because many volatile investment vehicles are not normally distributed.
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