Glossary
From A to Z all the terms you need to skip the jargon and get started!
Sharpe ratio
The Sharpe ratio, named after its creator, William F. Sharpe, is a financial metric used to assess the risk-adjusted performance of an investment.
It calculates the average return in excess of the risk-free rate per unit of volatility (standard deviation) of an investment. In other words, it measures the reward an investor receives for taking on additional risk 📈.
Example: If Investment A has a return of 12%, a risk-free rate of 2%, and a standard deviation of 10%, the Sharpe ratio would be (12% - 2%) / 10% = 1.0. A higher Sharpe ratio indicates better risk-adjusted performance.
Fun fact: William F. Sharpe was awarded the Nobel Memorial Prize in Economic Sciences in 1990 for his contributions to the Capital Asset Pricing Model (CAPM) and the development of the Sharpe ratio. 🏆