Table3: Case4 - Sharpe ratio in negative returns (6% risk free rate assumed))
3. A simple way of creating an adjusted ratio is presented here. better the fund.
In Table3: Case4, the return and risk of the Fund is higher than Index. We would need an adjustment to Sharpe Ratio to consistently figure out the better performers in different market scenarios.
The incorrectness of Sharpe in negative excess return scenario is often neglected while doing portfolio comparisons and leads to incorrect analysis, which most of the times might go unnoticed. Nevertheless, the incorrect analysis leads to incorrect decisions for investors.