Sharpe ratio

Definition

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). See also Modern Portfolio Theory.