Sharpe Ratio
Definition
What is Sharpe Ratio?
Excess return over a risk-free rateThe return assumed to be available from an investment with negligible default risk over a matching period. divided by total returnThe complete investment result from price changes plus income, assuming distributions are included. volatilityThe degree and frequency of price or return fluctuations..
Example in practice
How This Looks in Practice
A fund earning 12% above cash with 8% volatility has a higher Sharpe ratio than one earning the same with 15% volatility.
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Related Terms
Correlation
A statistic ranging from minus one to plus one that describes how two return series move together.
Portfolio AnalyticsPositive Correlation
A relationship in which two assets tend to move in the same direction.
Portfolio AnalyticsNegative Correlation
A relationship in which two assets tend to move in opposite directions.
Risk ManagementStress Test
An analysis of portfolio performance under severe but plausible scenarios.