Definition of Sharpe Ratio

Financial Terms Beginning with S

What is the Sharpe Ratio

The Sharpe ratio is a risk-adjusted measure of the return or performance that is calculated as the ratio between the excess return, which is the return in excess of the risk-free rate, and the volatility of a given portfolio. The higher the Sharpe ratio, the better the fund's historical risk adjusted performance.

The Sharpe ratio has been criticized for equally weighting positive and negative price movements that contribute to volatility, as it implicitly indicates that positive shocks augment the portfolio’s riskiness.

The Sharpe ratio is one of five popular technical investment risk-reward ratios. The other risk-reward ratios are alpha, beta, r-squared and standard deviation.

Glossary of Terms and Phrases

A financial dictionary or glossary is an essential tool to better understand the meaning of a specialized term or phrase. It would obviously make life much easier if everyone spoke the same language and used the same financial terms and phrases but that is not realistic.

We learn new languages to communicate with each other, transact business globally and to appreciate other cultures. Global finance is a specialized language that if understood and mastered, it will provide benefits that help to decrease risk and improve investment returns. Financial literacy is the foundation of developing good investment strategies and sound decision making.

Related Investment Terms

Alpha

Hedge Fund

Risk Ratio

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