Sharpe ratio

A measure of the mean return for each unit of risk within an investment portfolio which therefore determines whether gains in an investment are due to good decisions or excessive risk. It is calculated by subtracting the risk free rate of an investment such as a long-term gilt from the portfolio’s rate of return and dividing this figure by the standard deviation of the portfolio’s return. The greater the Sharpe ratio, the better its historical risk-adjusted performance. The Sharpe ratio was developed by William Forsyth Sharpe in 1966.

This definition is for general information purposes only