Home / Glossary / Sharpe Ratio

Sharpe Ratio

Risk-adjusted return: excess return divided by volatility.

The Sharpe ratio measures how much excess return (above the risk-free rate) an investment provides per unit of risk (standard deviation). Higher Sharpe ratios indicate better risk-adjusted performance. It's commonly used to compare portfolios or strategies.

Formula
Sharpe=E[rp]−rfσp\text{Sharpe} = \frac{E[r_p] - r_f}{\sigma_p}

Related Terms

Efficient Frontier

The set of portfolios offering the highest return for each level of risk.

Portfolio Volatility

Standard deviation of portfolio returns — total risk including diversification effects.

Maximum Sharpe Portfolio

The portfolio with the highest risk-adjusted return.