Overview
The Sharpe Ratio measures excess return above the risk-free rate per unit of volatility. It evaluates performance together with the total risk taken to earn it.
Formula
(Portfolio Return - Risk Free Rate) / Volatility
How to Interpret
High Value
A high Sharpe ratio indicates stronger excess return relative to the volatility assumed.
Low Value
A low or negative Sharpe ratio means the risk taken did not produce sufficient excess return.
Where It Is Used
Used to compare risk-adjusted performance and distinguish the more efficient investment among similar returns.