Interpreting the Sharpe ratio when excess returns are negative

Extracted from text ... Can the small investor beat the market by 'Dow investing'? 15 Interpreting the Sharpe ratio when excess returns are negative 1. INTRODUCTION* Fund performance evaluation has evolved from the simple comparison of portfolio returns, to the comparison of excess portfolio returns (returns relative to a risk-free rate), to the highly acclaimed Sharpe Ratio in which excess portfolio returns per unit of risk taken to achieve those returns are compared. Of these developments, the Sharpe Ratio enjoys arguably the greatest success and most widespread implementation. It has undergone several refinements and augmentations in its 37-year life, but the basic ..