GlobalAgInvesting:PortfolioConstruction–AdjustingforProvincialVariationsinSharpeRatios
By Stephen Johnston
August 20, 2021
Excerpt from article:
Sharpe ratio analysis is a well recognised tool in portfolio construction – the high-level concept being to maximise the expected return a portfolio will generate per expected unit of risk. More specifically:
“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 excess of the risk-free rate per unit of volatility or total risk. Volatility is a measure of the price fluctuations of an asset or portfolio. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. The risk-free rate of return is the return on an investment with zero risk, meaning it’s the return investors could expect for taking no risk (generally government bonds). Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.” Source: Investopedia
Canadian row-crop farmland investments have had Sharpe ratios materially higher than publicly traded equities and bonds over the last 30 years – meaning they produced much higher average returns over the risk-free rate per unit of total risk.
Original article here