Sharpe Ratio

Quantitative Metrics

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for risk. It is calculated by subtracting the risk-free rate from the portfolio return and dividing by the standard deviation of excess return.

Sharpe ratio answers: 'Am I being compensated for the risk I'm taking?' A ratio above 1.0 is generally acceptable; above 2.0 is very good. Two strategies with the same returns but different Sharpe ratios tell very different stories.