Sharpe ratio

From Financial Literacy Wiki

The Sharpe ratio or Sharpe index or reward-to-risk ratio is a measure of the mean return per unit of risk in an investment asset or a trading strategy. This means that for any portfolio, it should aim to achieve a high Sharpe index.

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken. When comparing two assets each with the expected return E[R] against the same benchmark with return Rf, the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios.

Sharpe ratios, along with Treynor ratios and Jensen's alphas, are often used to rank the performance of portfolio or mutual fund managers.

This ratio was developed by William Forsyth Sharpe in 1966. Sharpe originally called it the "reward-to-variability" ratio in before it began being called the Sharpe Ratio by later academics and financial professionals.