Sharpe ratio

Popular Terms
Measure of the performance of an investment, computed by dividing the excess return (that is over the return on a risk-free investment such as on Treasury bills) by the amount of risk taken to generate the excess (the standard deviation of the rate of return). A ratio of 1 indicates one unit of return per unit of risk, 2 indicates two units of return per unit of risk, and negative values indicate loss or that a disproportionate amount of risk was taken to generate a positive return. Invented by the Nobel laureate (1990) US economist William Sharpe (born 1934). Also called market price of risk. See also Modern Portfolio Theory.

Use 'Sharpe ratio' in a Sentence

My investment advisor suggested that, because I am young, I should look into higher-risk investments, which would boost the Sharpe Ratio of my investments even though I didn't have much capitol to begin with.
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If you want to see how well a stock is performing one of the better ways is to see if it has a positive sharpe ratio.
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The sharpe ratio was a useful calculation for us to perform to give us insight into our assets and risk position.
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Notable Quotable

Limitation of the Sharpe Ratio
"One should also be aware of high Sharpe ratio strategies. A strategy may have a high Sharpe ratio because it has so far been accumulating small gains quite consistently, but it could still be subject to a large loss when black-swan events strike."
- Unknown

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