GlossaryAdvanced
Sharpe Ratio
A measure of return earned per unit of volatility risk taken.
The Sharpe ratio measures how much return an investment earned per unit of volatility (risk) it exhibited, calculated by dividing excess return over a risk-free rate by the investment's standard deviation of returns.
A higher Sharpe ratio generally indicates a more favorable return-to-risk relationship, letting investments with different volatility levels be compared on a more like-for-like basis than raw return alone.
Examples
- Two assets with the same raw return but different volatility will have different Sharpe ratios.
- A higher Sharpe ratio generally indicates better risk-adjusted, not necessarily higher absolute, return.