Modified Sharpe Ratio

Categories: Investing, Metrics

See: Sharpe Ratio.

Bill Sharpe won all kinds of plaudits for assessing risk and return in investing. Put 5 bucks in the lottery and win a million, and you get a low Sharpe score. Why? Because the odds were one in a billion you'd win. You were just ungodly lucky. Beat the stock market by 5% a year for a decade compounded, and you likely have a high Sharpe Ratio. Likely lower risk, higher return opportunities drove your results.

So when the Sharpe ratio is modified (and it gets modified every spring when the bears come out of hibernation), additional elements are added to the formula to make it conform more directly with the globally complex market basket we live in. Think: Google's original search algorithm that was 100,000 lines of code...versus today, where it stands around 5 million. Modified = good.

Find other enlightening terms in Shmoop Finance Genius Bar(f)