The Share Ratio is a measure of risk-adjusted performance devised by William Sharpe. It is used to assess whether the returns on a portfolio are a result of good investments or from getting lucky with large amounts of risk.
An investment with a higher return for less risk will have a higher Sharpe Ratio than one with high levels of risk. Ideally an investor wants to have a portfolio with a high Sharpe Ratio.
The calculation for the Sharpe Ratio is:
- ( Expected Portfolio Return - Risk Free Rate ) / Portfolio Standard Deviation