Definition of Sharpe Ratio

Financial Terms Beginning with S

What is the Sharpe Ratio

The Sharpe ratio is a method of calculating the risk-adjusted return of an investment. The ratio is calculated by subtracting the risk-free rate from the return on a specific investment for a time period, which is usually one year, and then dividing the resulting figure by the standard deviation of the historical (annual) returns for that investment. The higher the Sharpe ratio, the better investment’s historical risk-adjusted performance.

The Sharpe ratio has been criticized for equally weighting positive and negative price movements that contribute to volatility, as it implicitly indicates that positive shocks augment the portfolio’s riskiness.

The Sharpe ratio is one of five popular technical investment risk-reward ratios. The other risk-reward ratios are alpha, beta, r-squared and standard deviation.

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Related Investment Terms


Hedge Fund

Risk Ratio

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