Modified Sharpe Ratio

AAA

DEFINITION of 'Modified Sharpe Ratio'

A ratio used to calculate the risk-adjusted 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.

INVESTOPEDIA EXPLAINS '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 high-risk result. The ratio is useful because many volatile investment vehicles are not normally distributed.

RELATED TERMS
  1. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Roy's Safety-First Criterion - ...

    An approach to investment decisions that sets a minimum required ...
  3. Risk-Free Rate Of Return

    The theoretical rate of return of an investment with zero risk. ...
  4. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  5. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
RELATED FAQS
  1. What does Value at Risk (VaR) have to do with maximization of shareholder wealth?

    By enabling investors to estimate with high probability the worst-case and best-case scenarios for the performance of a given ... Read Full Answer >>
  2. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Calculate the tracking error of an indexed exchange-trade fund (ETF) or mutual fund by doing a standard deviation percentage ... Read Full Answer >>
  3. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  4. Who is the counterparty of a derivative?

    The counterparty to a derivative is the party who takes the other side of the trade. Every derivative trade needs to have ... Read Full Answer >>
  5. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... Read Full Answer >>
  6. How does the market share of a few companies affect the Herfindahl-Hirschman Index ...

    In economics and commercial law, the Herfindahl-Hirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  2. Personal Finance

    Does Your Investment Manager Measure Up?

    These key stats will reveal whether your advisor is a league leader or a benchwarmer.
  3. Options & Futures

    Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  4. Investing

    Measure Your Portfolio's Performance

    Learn three ratios that will help you evaluate your investment returns.
  5. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  6. Active Trading Fundamentals

    How The Sharpe Ratio Can Oversimplify Risk

    When it comes to hedge funds, this measure is not reliable on its own.
  7. Mutual Funds & ETFs

    Safest Industries To Invest In

    Which are the safest industries and sectors for long-term investment and why?
  8. Bonds & Fixed Income

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  9. Trading Strategies

    How To Seek Out Winning Trades

    Hunt for new winners with carefully-drawn scanning filters and third party services.
  10. Trading Strategies

    The Pros & Cons Of Being A Trader On The West Coast

    There are certain benefits and drawbacks that go with being a trader on the West Coast of North America.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center