Explaining Sharpe index aka reward-to-variability ratio for Cryptocurrencies
Sharpe ratio is yet another index coming from traditional finance and it examines the performance of an investment adjusted for its risk. When assessing an asset, some investors look at its profitability, but forget to evaluate the risk. Taking into account the riskiness of an asset by the volatility of its profitability increases the objectivity of the asset quality indicator.
The index measures the risk premium per unit of deviation in a cryptocurrency, i.e. how well the investor is compensated for the risk when buying a crypto asset (the higher the Sharpe ratio = the better return for the same risk). So, the higher the Sharpe coefficient is, the better the profitability indicators for the portfolio investments are. On the other hand, a very low Sharpe index indicates that the investment will result in no profit.
The index is calculated as follows:
where Ra is the return, E[Ra] is the expected value of the excess of the asset return over the benchmark return and a is the standard deviation.