Sharpe Ratio

The Sharpe ratio is a risk-adjusted financial measure developed by Nobel Laureate William Sharpe. It uses a fund's standard deviation and excess return to determine the reward per unit of risk. The higher a fund's Sharpe ratio, the better the fund's "risk-adjusted" performance, given by

where  is the return on the portfolio,  is the risk-free return and  is the standard deviation of the fund's returns (i.e., the portfolio risk).

REFERENCES:

Sharpe, W. F. "The Sharpe Ratio." J. Portfolio Management 21, 49-58, 1994. https://www.stanford.edu/~wfsharpe/art/sr/sr.htm.