What Is Sharpe Ratio? Meaning & Example
Definition
The Sharpe ratio measures return earned per unit of risk, using excess return over a risk-free rate divided by volatility. Higher values mean better risk-adjusted performance.
Related terms
Alpha is the return an investment earns above or below what would be expected given its risk relative to a benchmark. Positive alpha suggests outperformance after adjusting for risk.
VolatilityVolatility measures how much and how quickly prices move. Higher volatility means bigger swings, which bring both more opportunity and more risk.
Total ReturnTotal return combines price change with income such as dividends or interest. It gives a complete picture of how an investment performed.
What is Sharpe Ratio?
The Sharpe ratio measures return earned per unit of risk, using excess return over a risk-free rate divided by volatility. Higher values mean better risk-adjusted performance.
Can you give an example of Sharpe Ratio?
A portfolio earning 8% with a 3% risk-free rate and 10% volatility has a Sharpe ratio of 0.5.