Sharpe Ratio

Sharpe Ratio

A ratio developed by Bill Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

Notes:

The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. The Sortino Ratio is a variation of this.

See also: Jensen's Alpha, Portfolio, Risk, Sortino Ratio, Standard Deviation, T-Bill

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Sharpe ratio

A measure of a portfolio's excess return relative to the total variability of the portfolio. Related: Treynor index. Named after William Sharpe, Nobel Laureate, and developer of the capital asset pricing model.