The Sharpe Ratio is a measure of the risk adjusted return of an investment. It is a way to examine and compare the performance of an investment by adjusting for its risk. It is represented mathematically as the average return minus the risk-free return divided by the standard deviation of return on an investment. In layman's terms, the Sharpe ratio represents the excess return per unit of deviation, or risk. The higher the Sharpe ratio, the higher the return per unit of risk.
Commercial real estate has the highest Sharpe Ratio when compared to other asset classes. This means the ratio of return-to-risk is higher than other asset classes. It outperforms large and small cap stocks, corporate and government bonds, and REITs. In the graph above, commercial real estate is represented by NPI, the National Council of Real Estate Fiduciaries Property Index. The NPI is the accepted index created to gauge the investment performance of the commercial real estate market.
The years represented above are 1993 - 2013. Source: Thomson Reuters Datastream
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