what if the expected return is lower than the risk-less return?
then it is negative
yes, it means the risk-free security is superior.
Can’t happen with any long term time horizon if markets work.
mwvt9 Wrote: ------------------------------------------------------- > Can’t happen with any long term time horizon if > markets work. gambling is an example 
Yeah that’s true.^ Won’t happen for financial markets if they are remotely close to efficient.
Geez- half the traders I know have negative Sharpe ratios.
That is because markets work.^ HA HA All I am saying is that expected return in the sharpe ratio is based upon CAPM which is going to have to have a positive market premium based on its assumptions (plus why would anyone hold a risky security if there was no expected return…price would adjust until there was, blah blah blah). You could have an ex post negative sharpe ratio for sure, but ex ante…not so much.
that happens all of the time … making money is not easy.
Sure, making risk adjustment money is not easy at all. That is why those that do get paid so much. The only way you could have a negative sharpe ratio is if EXPECTED return on risky assets is less than risk free assets. So for any long-term horizon there better be a risk premium for holding risk. I am starting to doubt myself though as two heavy hitter have weighed in against me.
it’s not always expected return. most of the time actual returns are used to calculate historical Sharpe.
If you are are evaluating performance then of course you are using actual returns and then you can have a negative value. But (as you know) the sharpe ratio can also be used to evaluate an investment beforehand for integration into a portfolio. In that case expected returns on the market or portfolio will be higher than the risk free rate. I answered the way I did because the original poster specifically asked about expected returns. I couldn’t think of a scenrio where expected returns on risky assets would be less than the risk free, but I have been wrong many times before.
mwvt9, I agree with you that in the long term this can’t hold. If so, your sales force has a staff that’s full of sh*t and a bunch of suckers as clients. In the short term, however, I would think it’s fairly common (it is at my firm, at least).