Modified Sharpe Ratio Calculator

Formula

The formula to calculate the Modified Sharpe Ratio (MSR) is:

\[ MSR = \frac{(R - R_f)}{DD} \]

Where:

\(MSR\) is the Modified Sharpe Ratio
\(R\) is the expected return (%)
\(R_f\) is the risk-free rate (%)
\(DD\) is the modified downside deviation (%)

What is a Modified Sharpe Ratio?

The modified Sharpe ratio is a financial metric used to evaluate the risk-adjusted return of an investment portfolio. Unlike the traditional Sharpe ratio, which uses standard deviation as the measure of risk, the modified Sharpe ratio uses downside deviation to focus on the negative volatility of returns. This makes it a more accurate measure of risk for investors who are particularly concerned about downside risk. The modified Sharpe ratio helps investors understand how much excess return they are receiving for the amount of downside risk they are taking on.

Example Calculation

Let's assume the following values:

Expected Return (R) = 8%
Risk-Free Rate (R_f) = 2%
Modified Downside Deviation (DD) = 5%

Using the formula:

\[ MSR = \frac{(8 - 2)}{5} = \frac{6}{5} = 1.20 \]

The Modified Sharpe Ratio is 1.20.