Sharpe Ratio Decoded
Pulled the Sharpe numbers across the marketplace last week. Wanted to know which strategy earned its return cleanly and which one earned it by sitting through drawdowns most retail investors would never have held through.
CAGR never tells you that. CAGR shows the size of the win. It does not show the volatility you ate to earn it. The plain-English explainer on volatility, drawdown and Sharpe sits at https://rupeecase.com/learn/
The math. Allcap Multi Asset did 43.57 percent CAGR over the five-year backtest with 21.51 percent annualised volatility. Nifty 50 TRI did 10.68 with 14.03 over the same window. The CAGR is 4.1x bigger. The volatility is only 1.5x bigger. So the reward per unit of risk is 2.3x. That is the Sharpe ratio . 1.79 versus 0.79. The methodology behind the 80/10/10 equity-debt-gold sleeve that produced it is open at https://rupeecase.com/strategies/methodology
A high CAGR with a low Sharpe is a strategy you cannot stay invested in. Which is the part nobody puts on the brochure.
Three questions worth running on any strategy or fund before money goes in.
One. Has the factsheet shown you the Sharpe or only the CAGR? Two strategies can both print 35 percent. Only one of them is holdable through the dips. Sharpe tells you which is which.
Two. Could you have actually sat through the worst drawdown that built the Sharpe? The 1.79 assumes a real human stayed invested through a 21.35 percent peak-to-trough that took 371 days to recover. The behavioural-fit test that tells you whether you can hold through that sits at https://rupeecase.com/risk-profile.html
Three. Is the manager paying you for skill or paying you for taking more risk? Nifty does Sharpe 0.79. Anything below that is paying you less reward for more risk eaten. The fee-stack version of the same argument is at https://rupeecase.com/compare
The strategy itself, with the full risk-adjusted breakdown, sits at https://rupeecase.com/strategies/allcap-multi-asset
CAGR tells you how much. Sharpe tells you how cheap. The compounder cares about both.
Educational content only. Figures are illustrative and computed on historical or representative data for teaching purposes. Not investment advice. Past performance does not guarantee future returns. Sourced from NSE, BSE, SEBI, AMFI, and RBI public data.