This measure is similar to the Sharpe ratio, but it uses beta as the volatility measure rather than standard deviation. The return (numerator) is defined as the incremental average return of a fund over the risk-free rate. The risk (denominator) is defined as a fund’s beta relative to a benchmark. The larger the ratio, the better.
Investors who are required to select and monitor investment managers should develop a basic understanding of investment statistics. Quantitative tools can provide you with good insight that you can use in your qualitative interviews with managers and when monitoring your investments.