Financial Ratios

Training by:     Rahul Agarwal    

www.infily.in
Rahul.Agarw

1 STANDARD DEVIATION

2 SORTINO RATIO

3 SHARPE RATIO

4 BETA

5 ALPHA
6 TREYNOR RATIO

7 R-SQUARED
l Ratios

www.infily.in
Rahul.Agarwal@infily.in
BACK TO INDEX

standard deviati
the standard dev
performance. sta
RETURNS mutual funds, th
1 -10% historical perform
2 100%
3 15%
4 -5% "+STDEV.S(
5 12% 32.88%
6 11%
7 5%
8 -12%
9 40%
10 10%

"Higher the standard deviation, high

 STANDARD DEVIATION
standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). ... With mutual fu
the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical
performance. standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). ...
mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on
historical performance.

rd deviation, higher the volatility hence more risky the portfolio is"
atility (risk). ... With mutual funds,
turns based on its historical
easure its volatility (risk). ... With
he expected returns based on its
BACK TO INDEX

How downside deviation is calculated

RETURNS Negative assets below average
1 -10% -0.1
2 20%
3 15% Downside deviaiton
4 -5% -0.05 7.594%
5 12%
6 11%
7 5% 0.05
8 -12% -0.12
9 40%
10 10%

"Higher the Sortino Ration better th

 The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from t
overall volatility by using the asset's standard deviation of negative portfolio returns, called d
deviation, instead of the total standard deviation of portfolio returns.

​Sortino Ratio=(Rp​−rf​​)/sd of negative Assets

If a portfolio gives 15% return and risk free returns are 6%..With downside deviation of 15% .
be the Sortino Ratio ?

Answer:

Portfolio Return 15%

Rf 6%
downside deviation 15%
sortino Ration 60.0%

o Ration better the risk adjusted returns are, hence better the portfolio is"
 tiates harmful volatility from total
ative portfolio returns, called downside
eturns.

h downside deviation of 15% .What will

ortfolio is"
BACK TO INDEX

"Higher the Sharpe Ration better the risk a

 : Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. A portfolio with a higher Sh
ratio is considered superior relative to its peer

The Sharpe ratio was developed by Nobel laureate William F. Sharpe and is used to help investors
understand the return of an investment compared to its risk. The ratio is the average return earned in
of the risk-free rate per unit of volatility or total risk.

Formula : (Rp-Rf/Standard deviation)

If a portfolio gives 18% return and risk free returns are 5% with standard deviation of 16% .What will b
Sortino Ratio ?

Answer:

Portfolio Return 18%

Rf 5%
Standard Deviation 16%
Sharpe Ratio 81.3%

on better the risk adjusted returns are, hence better the portfolio is"
io. A portfolio with a higher Sharpe

d is used to help investors

the average return earned in excess

deviation of 16% .What will be the

BACK TO INDEX
In finance, the beta (β or beta coefficient) of
arising from exposure to general market mov
factors. The market portfolio of all investable
Beta of fund < 1 Less risk as compared to Ben
Beta of fund >1 More risk as compared to Be
 β or beta coefficient) of an investment is a measure of the risk
e to general market movements as opposed to idiosyncratic
portfolio of all investable assets has a beta of exactly 1.
risk as compared to Benchmark
e risk as compared to Benchmark
BACK TO INDEX

For calculating Alpha 1first need to calculate Expected

return:
Expected return : Rf+( MR-rf)*beta
Difference between Actual returns-Expected return is
called Alpha.

Higher the Alpha better the performance of the fund mangager is.its an
 Alpha, often considered the active return on an investment, gauges the performance of an investment against a
market index or benchmark that is considered to represent the market's movement as a whole. The excess return
investment relative to the return of a benchmark index is the investment's alpha

If risk free retuns are 5%.Nifty has delieverd 15% retuns and beta of fund is .8. If fund has given 20% annual retu
so what is Alpha ?

Expected Returns 13.00% (see the fourmula here)

actural returns 20%

Alpha 7.00%

of the fund mangager is.its an excess returns of the fund over the expected returns
e of an investment against a
as a whole. The excess return of an

nd has given 20% annual returns

BACK TO INDEX

In essence, the Treynor ratio is a risk-adjusted measurement of retu

how much return an investment, such as a portfolio of stocks, a mut
earned for the amount of risk the investment assumed.

Formula : (Rp-Rf/Beta)
If a portflio gives 18% return and risk free returns are 5% with beta o

"Higher the Treynor Ration better the risk

adjusted measurement of return based on systematic risk. It indicates
as a portfolio of stocks, a mutual fund, or exchange-traded fund,
stment assumed.

ree returns are 5% with beta of 1.2 .What will be the Treynor Ratio ?

Answer:

Portfolio Return 18%

Rf 5%
Beta 1.20
Treynor Ratio 10.8%

tion better the risk adjusted returns are, hence better the portfolio is"
BACK TO INDEX

R-SQUARED

R-squared measures the relationship between a portfolio and its benchmark index
from 1 to 100. R-squared is not a measure of the performance of a portfolio. Rath
the portfolio's returns to the benchmark's returns
1 R-squared is a measure of the percentage of an asset or fund's performance as a r
reported as a number between 0 and 100. A hypothetical mutual fund with an R-s
its benchmark at all.
1 Perfectly Co-related
0 No correlation at all
lio and its benchmark index. It is expressed as a percentage
rmance of a portfolio. Rather, it measures the correlation of

r fund's performance as a result of a benchmark. It is

cal mutual fund with an R-squared of 0 has no correlation to