The Adjusted Sharpe Ratio (ASR) is a refined version of the Sharpe Ratio, taking into account skewness and kurtosis to provide a more accurate measure of risk-adjusted return. The Sharpe Ratio, while popular, can sometimes be misleading due to its assumption of normally distributed returns. By incorporating skewness and kurtosis, the ASR offers a more nuanced view of the performance of an investment.

**Formula**

The formula to calculate the Adjusted Sharpe Ratio (ASR) is:

**ASR = SR + (S/6) − (K/24)**

Where:

**SR**is the standard Sharpe Ratio,**S**is the skewness of the returns, and**K**is the kurtosis of the returns.

**How to Use**

**Sharpe Ratio (SR):**Enter the Sharpe Ratio of the investment.**Skewness (S):**Input the skewness of the investment’s returns. Skewness measures the asymmetry of the return distribution.**Kurtosis (K):**Input the kurtosis of the returns. Kurtosis measures the “tailedness” of the return distribution.

Click “Calculate” to find the Adjusted Sharpe Ratio.

**Example**

Suppose you have an investment with a Sharpe Ratio of 1.2, a skewness of 0.5, and a kurtosis of 3.0. Plugging these values into the formula:

**ASR = 1.2 + (0.5/6) − (3.0/24)**

**ASR = 1.2 + 0.0833 − 0.125**

**ASR = 1.1583**

This means the Adjusted Sharpe Ratio of your investment is approximately 1.158.

**FAQs**

**What is the Adjusted Sharpe Ratio?**

The Adjusted Sharpe Ratio refines the traditional Sharpe Ratio by considering skewness and kurtosis to provide a more accurate measure of risk-adjusted return.**Why is skewness important in calculating the ASR?**

Skewness measures the asymmetry of return distribution. Positive skewness suggests more frequent small losses and a few large gains, while negative skewness suggests more frequent small gains and a few large losses.**Why is kurtosis important in calculating the ASR?**

Kurtosis measures the “tailedness” of the return distribution. Higher kurtosis indicates a higher probability of extreme values (outliers), which can affect risk assessment.**How does the ASR differ from the standard Sharpe Ratio?**

The ASR accounts for skewness and kurtosis, while the standard Sharpe Ratio assumes returns are normally distributed without these factors.**What is a good Adjusted Sharpe Ratio?**

A higher ASR indicates a better risk-adjusted return. However, what is considered “good” can vary depending on the specific investment and risk tolerance.**Can the ASR be negative?**

Yes, a negative ASR indicates that the risk-free rate exceeds the investment’s risk-adjusted return when accounting for skewness and kurtosis.**How is skewness calculated?**

Skewness is calculated using statistical methods that measure the degree of asymmetry in the distribution of returns.**How is kurtosis calculated?**

Kurtosis is calculated using statistical methods that measure the distribution’s “tailedness” or likelihood of extreme outcomes.**What are the limitations of the ASR?**

The ASR assumes that skewness and kurtosis are the primary factors influencing risk beyond volatility, which may not capture all aspects of an investment’s risk.**Is the ASR widely used in finance?**

The ASR is used by some professionals in finance, especially those dealing with non-normal return distributions, but it is less commonly used than the traditional Sharpe Ratio.**Can I use the ASR for any asset class?**

Yes, the ASR can be applied to any asset class, as long as you have the necessary data to calculate skewness and kurtosis.**How does the ASR handle non-normal distributions?**

The ASR adjusts the standard Sharpe Ratio to account for the effects of non-normal distribution, providing a more accurate reflection of risk-adjusted performance.**What data do I need to calculate the ASR?**

You need the Sharpe Ratio, skewness, and kurtosis of the investment’s returns.**Can the ASR be used for portfolio analysis?**

Yes, the ASR can be applied to portfolios to assess the risk-adjusted return considering skewness and kurtosis.**Is the ASR applicable in different market conditions?**

The ASR can be useful in various market conditions, especially in markets where return distributions deviate significantly from normality.**What is the significance of the 6 and 24 in the formula?**

The numbers 6 and 24 in the formula are constants used to adjust the contribution of skewness and kurtosis to the overall risk-adjusted return.**How does the ASR improve investment decision-making?**

By accounting for skewness and kurtosis, the ASR provides a more comprehensive view of an investment’s risk, leading to better-informed decisions.**Is the ASR relevant for long-term investors?**

The ASR can be particularly relevant for long-term investors, as it helps identify investments with favorable risk-adjusted returns over time.**Can I calculate the ASR manually?**

Yes, the ASR can be calculated manually using the provided formula, but using a calculator like the one provided here simplifies the process.**Is the ASR suitable for comparing different investments?**

The ASR can be useful for comparing investments, especially when their return distributions differ significantly from normality.

**Conclusion**

The Adjusted Sharpe Ratio is a valuable tool for investors seeking to understand the risk-adjusted performance of their investments, particularly in situations where return distributions are not normally distributed. By incorporating skewness and kurtosis, the ASR provides a more accurate reflection of risk, helping investors make better-informed decisions. Use our calculator above to easily compute the ASR for your investments.