Sharpe Ratio

The Sharpe Ratio measures the risk-adjusted return of a financial portfolio. The ratio represents the average excess return over the risk-free rate for every unit of additional risk (volatility) the investor takes. The Nobel laureate William F. Sharpe came up with the Sharpe ratio.

A higher Sharpe ratio for a fund or a portfolio is good when it attains the same or excess returns compared to portfolios with lower Sharpe ratios as it denotes higher returns at lower risk (higher risk-adjusted returns).