Adjusted Sharpe Ratio Calculator

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

1. Sharpe Ratio (SR): Enter the Sharpe Ratio of the investment.
2. Skewness (S): Input the skewness of the investment’s returns. Skewness measures the asymmetry of the return distribution.
3. 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

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. How is skewness calculated?
   Skewness is calculated using statistical methods that measure the degree of asymmetry in the distribution of returns.
8. How is kurtosis calculated?
   Kurtosis is calculated using statistical methods that measure the distribution’s “tailedness” or likelihood of extreme outcomes.
9. 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.
10. 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.
11. 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.
12. 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.
13. What data do I need to calculate the ASR?
    You need the Sharpe Ratio, skewness, and kurtosis of the investment’s returns.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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.