Measuring risk is an important part of evaluation in investing. There are hardly any riskfree asset classes, so knowing how to assess the inherent risk of an investment is key. Two common risk measurements in modern portfolio theory, or MPT, applied to both individual stock and mutual fund analysis are the Sharpe ratio and alpha. These statistical measures can show historical volatility, helping investors determine which stocks and funds fit well in line with their investment risk tolerance.
The Sharpe ratio is a riskadjusted return measurement developed by economist William Sharpe. It is calculated by subtracting the riskfree return, defined as a U.S. Treasury Bond, from the investment's rate of return, and then dividing by the investment's standard deviation of returns. For investors, the Sharpe ratio illustrates how a mutual fund achieves its returns. It is useful in this way for comparing funds with similar historical returns. For example, if fund A and fund B both have 10year returns of 5%, and fund A has a Sharpe ratio of 1.40 and fund B has a Sharpe ratio of 1.25, the conservative investor chooses fund A, as a higher Sharpe ratio indicates a higher riskadjusted return.
Alpha also offers a way to measure returns on a riskadjusted basis but applies the measure in relation to a benchmark to gauge performance. For investors seeking an investment that closely matches the performance of a chosen benchmark, alpha is the number to review. Alpha equal to 1.0 indicates the fund has beaten the benchmark by 1%, so the higher the alpha, the better. If the fund holds similar investments to the benchmark, a positive alpha indicates the fund manager's worth.

Is alpha the best risk measure?
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What metrics should I use to evaluate the risk return tradeoff for a mutual fund?
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What is the difference between a sharpe ratio and an information ratio?
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Does a negative alpha automatically mean I should sell?
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What are the best technical indicators to complement Weighted Alpha?
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What is the difference between a Sharpe ratio and a Traynor ratio?
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Sharpe Ratio
The Sharpe ratio is the average return earned in excess of the ... 
Appraisal Ratio
A ratio used to measure the quality of a fund's investment picking ... 
Modified Sharpe Ratio
A ratio used to calculate the riskadjusted performance of an ... 
Risk Management
Risk management occurs anytime an investor or fund manager analyzes ... 
Excess Returns
Investment returns from a security or portfolio that exceed a ... 
Dispersion
A statistical term describing the size of the range of values ...