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Sharpe Ratio

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Definition: The Sharpe ratio is computed in context of the Sharpe-Linter CAPM. Defined for an asset portfolio a that has mean ma, standard deviation sa, and with risk-free rate rf by:

[ma-rf]sa

Higher Sharpe ratios are more desirable to the investor in this model.

The Sharpe ratio is a synonym for the "market price of risk." Empirically, for the NYSE, the Sharpe ratio is in the range of .30 to .40.

(Econterms)

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