Coefficient of variation is the relative maount of variability in a distribution relative to a reference point. Equation is CV= Standard Deviation of X/ Average Value of x. Whatever is less, has less relative disperision from the mean and is therfore less risky.
Sharpe Ratio is the Amount of return per unit of risk that is returned.
Equation is (Portfolio Return - Risk Free Return) / Standard Deviation of Portfolio
- Sharpe Ratio Tips
- 1. If negative Sharpe Ratio, the higher the sharpe ratio does not ipmly that better risk adjusted performance. Increasing risk moves a negative Sharpe ratio closer to zero.
2. Sharpe ratio is useful only when standar deviation si appropriate maeasure of risk. In the case of option, with high probability of low return and low probablility of large losses, the standard deviation may be off, and sharpe ratio too high.