Sharpe ratio

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The Sharpe ratio is a measure of risk-adjusted performance of an investment asset, or a trading strategy. It is defined as:

[S = \over \sigma}],

where [R] is the asset return, [R_f] is an expected return of another "standard" asset, such as the risk free rate of return, [] is the expected value of the excess of the asset return over the risk free return, and [\sigma] is the standard deviation of the asset returns.

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken. When comparing two assets each with return [] against the same benchmark with return [R_f], the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios.

This ratio was developed by William Forsyth Sharpe.

See also

• Modern portfolio theory
• Sortino ratio
• Upside potential ratio
• Treynor ratio

External link

• [The Sharpe ratio]

 

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