Using Sharpe and Information Ratios to Compare Asset Returns
Summary
The article explains risk-adjusted performance measurement through the Sharpe ratio and its benchmark-relative counterpart, the Information ratio. It describes the Information ratio as excess portfolio return over a benchmark divided by the variability of those excess returns. The Sharpe ratio instead compares an asset or strategy’s return with a risk-free rate, commonly represented by short-term Treasury bills, and scales the excess by return volatility. It also notes that annualization assumptions depend on trading frequency, distinguishing markets with limited trading days from continuously traded crypto assets.
The article illustrates historical calculations using Bitcoin, traditional assets, and several digital assets, drawing on public market data and a digital-asset metrics provider. It reports that the sampled digital assets generally moved together, while Chainlink showed a lower correlation with Bitcoin than Bitcoin Cash. These are historical observations from a particular period and a selected set of assets, not a forecast or proof of diversification. The author also flags gaps in free stock data and cautions that Sharpe alone is not a complete performance assessment; benchmark selection and consistent data quality matter.
Key ideas
- The Sharpe ratio scales returns above a risk-free rate by the volatility of asset returns.
- The Information ratio scales returns above a chosen benchmark by the variability of those excess returns.
- Annualization should reflect how often the asset or market can be traded.
- The article compares historical Sharpe ratios across Bitcoin, traditional assets, and selected digital assets.
- Its sample shows varying crypto correlations, but the observations are limited to a specific period and asset selection.
- Data quality and benchmark choice affect the usefulness of ratio comparisons.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.