Tax Planning & Preparation

Alpha and Sharpe’s: A Look at Risk and Return

Alpha and Sharpe’s: A Look at Risk and Return

Of Alpha and Sharpe’s: A Look at Risk and Return

CH has always believed in the benefit of active investment management like portfolio managers making decisions in what assets a client should own within a mutual fund rather than taking a passive investment approach like buying and holding a mutual fund or ETF that tracks an index. Two of the most important tools we use for monitoring and measuring the success of a specific portfolio manager are known as Alpha and the Sharpe Ratio.

What is Alpha?

Alpha measures the ability of an investment strategy’s ability to outperform its benchmark and its peer group. By definition, an index will always have an Alpha of zero. Investments like index ETFs will therefore have an Alpha of slightly less than zero to account for the fee being charged to run it.

Active managers, by contrast, will want to show positive Alpha, meaning they are outperforming that index net of their fees. The higher the Alpha typically the better. The one limitation of this measurement is that it does not account for how much risk the manager is taking on, and that brings us to the Sharpe Ratio.

What is the Sharpe Ratio?

The Sharpe Ratio seeks to measure the total return of an investment compared to the investment’s risk. Created by Dr. William Sharpe in 1966 this ratio was designed to measure the average return earned over the risk-free rate per unit of total risk. Normally the risk-free rate is how much can be earned on a high-interest savings account, and risk is measured by the level of volatility within a fund, also known as the standard deviation. Generally speaking the higher the Sharpe Ratio the better as a high rate of return with low volatility is what most investors are looking for.

How does Alpha and the Sharpe Ratio affect your portfolio?

Alpha highlights the value of an active investment approach compared to a passive strategy. At CH, we are constantly monitoring the performance of our portfolio managers compared to the index and our managers’ peers. This is because any underperformance could signal something no longer working for the portfolio manager and their team, or that the mutual fund’s mandate no longer works with current market conditions.

We are also looking for ways to increase the Sharpe Ratio for our clients. We diversify clients’ portfolios with assets that have low correlations which decreases a clients’ portfolio risk without sacrificing too much return. This is part of CH’s philosophy that our clients should participate in returns when the market is performing well while protecting their capital when markets are underperforming.

As always the team at CH keeps an eye on all of these indicators and focuses especially on 3, 5, and 10-year performance numbers to give us context. By definition, an active manager will underperform from time to time. It is a part of being different from the market. But these managers are expected to outperform and/or lower our client’s risk over the long term, showing the value that they add through their work.

Although these are not the only tools portfolio managers and CH use to analyze risk and return within our clients’ portfolios, they are important. Hopefully, this article has helped to explain what these tools are, and how we use them.

As always, we welcome any questions or comments.

All the best,

Devin Gorgchuck, Wealth Advisor

& Your CH Financial Team


All the best,


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We’re looking for aspirational clients who require the whole spectrum of financial services because managing the whole is how we’re able to deliver unbeatable value – it’s our “secret sauce.”If this describes you, let’s set up a meeting andget to know each other.

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I just want to say we have been with your team since 1993, and we have never had any bad advice. The investments you set up for us during this time has paid for university education for our two granddaughters and provided a significant monthly income for us to augment our pensions.

We are with you for the long run and are not going anywhere. Jeremy has told us that at these times the numbers tend to scare you, but you haven’t really lost anything if you don’t panic and sell.

Ken M, Calgary

With CH Financial since 1993

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When I became a client of CHF it was a real game-changer as I was going through a very difficult time both professionally and personally.

I went through a divorce and the loss of a job and a parent, all within a 12-month period. While it was very tough to deal with at the time, I was reassured by the fact that the team at CHF had my back and really cared about me and what I was going through.

Looking back now, I’m not sure how I would have managed without the support of the CHF family.

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I would highly recommend the CHF team to others going through life-changing and difficult situations as your financial partner.

Linda, Victoria

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As an investment industry professional, I am constantly on the go and maximizing my peak career earning years in my 40s. With travel and work commitments I am very limited for time to spend with family and do the things I love to do and chose CH Financial to allow me more freedom and lifestyle balance.

Being in the investment industry my whole career and an extremely busy professional, I know I could probably do a good job at managing my money as I work in the industry after all while I rely on and trust the CH Financial team that they will take care of the details, both growing my assets as well as taking care of every aspect of my financial situation, including my tax, investments and insurance, they simply take away the stress of having to worry about it all and help me to navigate the complexities for me so it all meshes together and importantly saves me valuable time and headaches.

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Since engaging CHF more than 5 years ago we have enjoyed significant growth in our investments but more importantly, we have peace of mind and sleep much better at night knowing the team at CHF has our financial back and anything financial they will take care of for us.

I would have absolutely no hesitation in recommending the team at CHF to other career-focused busy professionals who really value their time and lifestyle balance.

Kevin & Sharron, Calgary

Financial industry professionals

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Prior to joining CH Financial as a client, I had been partially managing our investments and using a bank-owned broker for many years, with moderate success. When we became clients of CHF, I quickly realized how little I knew about the complexities of managing investments and the importance of seeking out the best specialists in the industry to assist with my family’s full financial picture.

Brian and the team at CHF encouraged us to take an introspective look at our assets and expenditures and even helped us implement a comprehensive budget. The team really stepped up to take care of all aspects of our financial picture, including portfolio design, CH Financial introduced us to a lawyer who took care of everything for us, estate planning and tax, while helping us simplify our financial affairs.

Being of the sandwich generation my wife and I spend considerable time caring for our surviving parents and our grandkids, so

freeing up valuable time is essential to allow us to do the things we love to do. The team at CHF takes care of the details and today my wife and I enjoy a comfortable, stress-free financial situation.

Over the years as a client of CHF, both our portfolio and wealth has grown exponentially, more than we could have ever imagined. Now that we are both happily retired, having the CHF team in our corner helps us to sleep better at night knowing that our somewhat complex financial puzzle is being looked after by a team of people that really care, as opposed to being treated like a number by a big bank.

I would have no hesitation in recommending the CHF team to others looking for a superior financial home in Calgary and a safe place to invest your hard-earned money.

Ian C, Calgary

Comfortably retired thanks to CH Financial