Learn About the Sharpe Ratio

What is the Sharpe Ratio?

The Sharpe Ratio is a measure developed by Nobel laureate William F. Sharpe to help investors understand the return of an investment compared to its risk.

It is calculated by subtracting the risk-free rate from the expected return, then dividing by the standard deviation of the portfolio's excess return.

The Sharpe Ratio provides a way to compare different investments on a risk-adjusted basis. Higher ratios indicate better risk-adjusted performance.

Sharpe Ratio = (Rp - Rf) / σp
Where:
  • Rp = Expected portfolio return
  • Rf = Risk-free rate
  • σp = Portfolio standard deviation