The Sharpe ratio is a method developed to assess the dynamic between risk and return. It enables us to evaluate individual elements within, or entire, portfolios. To complete the review, you must find the average return earned in excess of the risk-free rate per unit of total volatility.

To complete the review, you must find the average return earned in excess of the risk-free rate per unit of total volatility.

The greater the Sharpe Ratio, the better risk adjusted performance that reviewed asset or portfolio has. A Sharpe Ratio of more than 1 indicates an excess of returns for each unit of risk undertaken.

When wine is added into an investment portfolio it more than doubles the overall Sharpe Ratio to over 0.8. This is true for a wide range of portfolio compositions, including any arrangement of equities, commodities, real estate, bonds or hedge funds.

Even if fine wine as an asset class didn’t have the potential to create alpha, or an active return, the ability to balance risk shows it has a role to play within the modern-day investment portfolio.

(Source: Bloomberg)