What is a Sharpe Ratio?
A measure of risk-adjusted return: (portfolio return - risk-free rate) / portfolio volatility. ILS has historically delivered attractive Sharpe ratios.
Sharpe Ratio
A measure of risk-adjusted return: (portfolio return - risk-free rate) / portfolio volatility. ILS has historically delivered attractive Sharpe ratios.
How it works in practice
Over a ten-year period, an ILS fund delivered an annualised return of 7.5% with a standard deviation of 4%. Using a risk-free rate of 3%, the Sharpe ratio is 1.125. By comparison, a global equity fund returning 9% with a standard deviation of 15% has a Sharpe ratio of 0.4. The ILS fund's higher Sharpe ratio reflects its more favourable return per unit of risk.
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