Risk and Returns: The Sharpe Ratio
Use pandas to calculate and compare profitability and risk of different investments using the Sharpe Ratio.Start Project
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When you assess whether to invest in an asset, you want to look not only at how much money you could make but also at how much risk you are taking. The Sharpe Ratio, developed by Nobel Prize winner William Sharpe some 50 years ago, does precisely this: it compares the return of an investment to that of an alternative and relates the relative return to the risk of the investment, measured by the standard deviation of returns.
In this project, you will apply the Sharpe ratio to real financial data using pandas.
- 1Meet Professor William Sharpe
- 2A first glance at the data
- 3Plot & summarize daily prices for Amazon and Facebook
- 4Visualize & summarize daily values for the S&P 500
- 5The inputs for the Sharpe Ratio: Starting with Daily Stock Returns
- 6Daily S&P 500 returns
- 7Calculating Excess Returns for Amazon and Facebook vs. S&P 500
- 8The Sharpe Ratio, Step 1: The Average Difference in Daily Returns Stocks vs S&P 500
- 9The Sharpe Ratio, Step 2: Standard Deviation of the Return Difference
- 10Putting it all together
Founder & Lead Data Scientist at Applied Artificial Intelligence
Stefan is the Founder & Lead Data Scientist at Applied Artificial Intelligence. He has 15 years of experience in finance and investments, with a big focus on emerging markets.