Definition of Sharpe Ratio

Financial Terms Beginning with S

What is the Sharpe Ratio

The Sharpe ratio is a method of calculating the risk-adjusted return of an investment. The ratio is calculated by subtracting the risk-free rate from the return on a specific investment for a time period, which is usually one year, and then dividing the resulting figure by the standard deviation of the historical (annual) returns for that investment. The higher the Sharpe ratio, the better investment’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


Hedge Fund

Risk Ratio

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