Risk
The Sharpe ratio is a measure of risk-adjusted return: the excess return earned per unit of risk.
The Sharpe ratio measures excess return (portfolio return minus the risk-free rate) per unit of risk (volatility). The higher the Sharpe ratio, the better the risk-adjusted return.
As rough rules of thumb: a Sharpe ratio below 0.5 is poor, 0.5–1.0 acceptable, 1.0–2.0 good and above 2.0 excellent (rarely sustained over the long run).
The ratio lends itself well to comparing different portfolios or strategies, because it weighs both return and risk. A portfolio with a lower return but markedly lower risk can show a higher Sharpe ratio.
Related terms
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