Sharpe Ratio

What is the Sharpe Ratio?

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
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