Series 65: 7.3.9 Sharpe Ratio

7.3.9  Sharpe Ratio

The Sharpe ratio is one of the most well-known measures of risk-adjusted return, and it uses the investment’s standard deviation to measure that return. Investments with a high Sharpe ratio have returns that are higher relative to the risk their investor takes. Investment with low Sharpe ratios have returns that are lower relative to the risk their investor takes.

In the numerator of the formula above, the riskless rate of return is subtracted from the investment’s actual return. The riskless rate of return is the return on a kind of investment with, essentially, no risk.