Now use the Sharpe Ratio to calculate Returns on your Investments!

Dear Readers, 
Finance is aways messy. 
Handling finance and investing for fruitful returns is an art!
There are various instruments in investments that includes crypto investing!
Understanding market - at large, ebbs and flows, attempting to ‘beat the market’ and ride the next wave of prosperity is a highly appealing prospect that has resulted in an entire industry established on the idea that it’s possible to build wealth by participating in the market.
But, markets are messy.
Many tools, numbers, fractions, and devices have been invented over the years to aid in the never-ending quest for better market understanding. Each of them claims to offer an additional insight that makes it slightly less likely for you to end up ruining all your fortunes. One of the earliest, and most popular devices is the Sharpe Ratio.
Named after the man who drummed it up (a certain economist named William F. Sharpe), it has since gone on to occupy a stable position in the periodic report of all mutual funds seeking to convince prospective investors about the superiority of their portfolio management skills.
Calculating the Sharpe Ratio
For the sake of everyone’s easy understanding, you all should know what this number represents, how it is being calculated, what finance analysts tell you it means, and what it REALLY means.
Let’s start with how it’s calculated first (no different from how we learned for formulae in school):Do not be fooled by these symbols, what they represent is actually very simple. A brief with accurate description are as follows:
Rx = Return of the portfolio (over a certain period)
Rf = Risk-free return (as represented by the historical return of a government bond)
0 = Standard deviation (a measure of the volatility of the portfolio.
In simple terms, the Sharpe Ratio is the difference between the risk-free return and the return of an investment divided by the investment's standard deviation.
Now, almost everything that goes into the calculation of a Sharpe Ratio is calculated in hindsight, i.e. it assumes that past performance is a reasonably good indicator of future performance. But more than anything else, it assumes that the market follows a bell curve, i.e. a normal distribution where the extremes are less likely and that most observations fall around the middle. Here’s the famous IQ bell curve meme to help you visualize it:
Unfortunately, markets do not behave like this and as maverick statistician Nassim Taleb had once quoted:
“these models were adopted for mathematical convenience, not reality”.
So let that be in the back of your mind at all times when you see a Sharpe Ratio or any other performance indicator used by Finance gurus to convince you of something.
Then what does the Sharpe Ration means, then?
The Sharpe Ratio was conceived as a number that would measure the risk-to-reward profile of a certain investment. So a higher number means you get more reward for the risk you have taken while a lower number means that you don’t get as much return for the risk you just took.
Like all measures in finance, the Sharpe Ratio doesn’t tell you much as a standalone value. It’s best used as yet another tool in comparing different investment options to see how they fare on a risk-adjusted basis. Simply because a certain portfolio has a higher return doesn’t mean it’s any better. The Sharpe Ratio assumes that higher returns normally come with greater risk and it attempts to remove that risk to see how the investment fares in the absence of volatility. In other words,
It’s always a great way to ‘separate the wheat from the chaff’.
Then, how is it useful to you?
Think of the Sharpe Ratio as yet another tool in your arsenal to make better investment decisions. Mutual Funds in every part of the world include the Sharpe Ratio in their annual reports to show how well they did on a risk-adjusted basis. As a rule of thumb, a Sharpe Ratio between 1 and 2 is good, 2 and 3 is great, with anything above 3 being excellent.
Start look out and explore this further with your portfolios!
If you’ve just started investing in this area, just consider opening that email sent to you by the mutual fund / Asset Management Companies (AMCs) containing the annual report and find the Sharpe Ratio.
If you think it’s a little too low for your liking, start scouting for other options and see if it might make more sense to invest elsewhere.
Who knows?
You just might end up maximizing your returns in the long run!