Glossary
Sharpe Ratio
A measure of risk-adjusted return calculated as excess return divided by standard deviation of returns.
The Sharpe ratio, developed by William F. Sharpe, answers whether a strategy compensates investors for the risk taken. It normalizes returns by volatility, making it easier to compare strategies with different risk profiles.
Key Points
- Higher Sharpe ratios mean better risk-adjusted performance.
- Sharpe > 1 is acceptable, > 2 is good, > 3 is excellent.
- It penalizes both upside and downside volatility equally.