Sharpe Ratio

Definition

The Sharpe Ratio is a risk-adjusted metric that measures an investment’s excess return per unit of total risk. A higher Sharpe Ratio indicates better risk-adjusted performance, with values above 1 generally considered good.

Formula

$\text{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p}$

Where:

• $R_p$ = Portfolio return
• $R_f$ = Risk-free rate
• $\sigma_p$ = Standard deviation of portfolio returns