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What is Sharpe Ratio?

The Sharpe ratio is a measure of the risk-adjusted return of an investment. It is calculated by subtracting the risk-free rate of return (such as the return on a government bond) from the investment’s return, and then dividing that number by the investment’s standard deviation of returns. The result is a ratio that indicates how much excess return an investment generates for each unit of risk it takes on.

The Sharpe ratio is commonly used to compare the performance of different investments and to determine the relative attractiveness of an investment. A higher Sharpe ratio indicates that an investment has generated a higher return for a given level of risk, making it a more attractive option.

The Sharpe ratio is named after Nobel laureate William F. Sharpe, who developed the concept in the 1960s. It is a widely used measure of risk-adjusted return and is considered an important tool for evaluating the performance of an investment.

“Truth—or, more precisely, an accurate understanding of reality—is the essential foundation for any good outcome.” – Ray Dalio

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