Risk & Money Management
Intermediate
Sharpe Ratio
Also called: Sharpe
A risk-adjusted return metric: excess return divided by standard deviation of returns.
Definition
Sharpe ratio (William Sharpe, 1966) measures how much return you got per unit of volatility. Higher is better. >1 is decent, >2 is excellent, >3 is exceptional (and usually too good to be true).
Limitations: Sharpe penalises upside volatility equally with downside (use Sortino for asymmetric strategies), and assumes returns are normally distributed.
Formula
Sharpe = (Return − Risk-free rate) / Standard deviation of returns