Sharpe Ratio

Learn more about Sharpe Ratio

The Sharpe ratio is a measure used to evaluate the performance of an investment while taking into account the risk associated with that investment. The Sharpe ratio was developed by researcher William F. Sharpe.

The Sharpe ratio is calculated by taking the difference between the average return of an investment and the risk-free interest rate, and then dividing that difference by the standard deviation of the investment's returns. The idea behind this formula is that the greater the difference between the average return and the risk-free interest rate, the higher the potential return, but also the higher the risk. Thus, the Sharpe ratio measures excess return per unit of risk.

$$\text{Sharpe Ratio} = \frac{r_p - r_{rf}}{\sigma}$$

rp ​ = return of portfolio

rrf ​= risk-free rate

σ​ = standard deviation of the portfolio’s excess return

More info : Investopedia

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