What’s the difference between Sharpe ratio and CAGR?

December 5, 2022

The Sharpe ratio is a measure of the risk-adjusted return of an investment, while the compound annual growth rate (CAGR) is a measure of the growth of an investment over a given period of time.

The Sharpe ratio is calculated by subtracting the risk-free rate of return from the investment’s return, and then dividing that number by the investment’s standard deviation of returns. The result is a ratio that indicates how much excess return an investment generates for each unit of risk it takes on.

On the other hand, the CAGR is calculated by taking the investment’s value at the end of the period and dividing it by its value at the beginning of the period, raised to the power of 1 divided by the number of years in the period. The result is a measure of the average annual growth rate of the investment over the given period.

In summary, the Sharpe ratio is a measure of risk-adjusted return, while the CAGR is a measure of the growth of an investment over time. These two measures are often used together to evaluate the performance of an investment, but they serve different purposes and provide different insights into an investment’s performance.

“Those who know that they are profound strive for clarity. Those who would like to seem profound to the crowd strive for obscurity. For the crowd believes that if it cannot see to the bottom of something it must be deep.” – Nietzsche

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