When choosing between two portfolios, looking at returns alone is misleading — the portfolio that achieves the same return with less risk is superior. The Sharpe ratio, developed by Nobel laureate William Sharpe in 1966, is the most widely used metric for measuring portfolio performance on a risk-adjusted basis.
How Is the Sharpe Ratio Calculated?
Sharpe ratio = (Portfolio return − Risk-free rate) / Portfolio standard deviation. In Turkey, the risk-free rate is typically the TLREF or short-term government bond yield. Standard deviation measures return volatility. The result shows how much excess return is earned per unit of risk.
How to Interpret It
Sharpe > 1: Good — satisfactory return per unit of risk. Sharpe > 2: Excellent — rarely seen. Sharpe < 0: The portfolio underperformed the risk-free rate. The Sharpe ratio is ideal for comparing portfolios: the one with the higher Sharpe used risk more efficiently.
Sharpe vs Sortino
A limitation of the Sharpe ratio is that it penalizes upside volatility. A rapidly rising stock shows both upside and downside fluctuation — Sharpe counts this negatively. The Sortino ratio solves this by using only downside deviation. For momentum factor strategies, the Sortino ratio typically provides a more meaningful metric.
Sharpe Ratio on BIST
Turkey's high inflation and high risk-free rate directly impact Sharpe calculations. With TLREF around 45-50%, a portfolio needs returns far above inflation for a positive Sharpe. BIST Sharpe ratios are therefore generally lower than developed markets — this doesn't mean the market is poor, it reflects the high risk-free rate.
Related articles: Portfolio Management Guide, Portfolio Optimization, Modern Portfolio Theory, BIST Stock Screening Guide, Fundamental Analysis Guide, What Is P/E Ratio?, What Is P/B Ratio?, BIST Sector Analysis.
