Performance & risk
Sharpe Ratio
Excess return earned per unit of total return volatility.
What Sharpe Ratio Means
The Sharpe ratio compares return above a risk-free rate with the standard deviation of returns. It treats positive and negative variability as risk.
Sharpe Ratio Formula
Sharpe ratio = (Rₚ − R𝒻) ÷ σₚ
How to Read the Result
A portfolio returns 9%, the risk-free rate is 4%, and annualized volatility is 10%. Its Sharpe ratio is 0.50.
Limitations
- It penalizes upside and downside volatility equally.
- Non-normal returns can hide tail risk.
- It omits drawdown, leverage, and liquidity.
Common Questions
What is a good Sharpe ratio?
There is no universal cutoff. Compare relevant alternatives calculated with the same inputs and period.
Measuring return and risk
- Sortino ratioDefinition
- Maximum drawdownDefinition
- Treynor ratioDefinition
- Information ratioDefinition
- Profit factorDefinition