Sharpe ratio measures risk-adjusted return — excess return over the risk-free rate, divided by standard deviation of returns. Created by Nobel laureate William Sharpe, it answers: how much return did you earn per unit of risk taken? Higher Sharpe is better. A portfolio returning 10% annually with 15% volatility has a Sharpe of about 0.5 (assuming 2.5% risk-free rate); 12% return with 10% volatility has Sharpe of 0.95. Sharpe ratios above 1 are considered good; above 2 excellent. Use Sharpe to compare portfolios with different risk levels on equal footing — high returns from high-volatility strategies don't necessarily indicate skill.
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Sharpe Ratio
August 22, 2026 · Aditya Gupta
Investing
Related terms
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