FRM Glossary · Part I · Investment

Sharpe Ratio

Excess return of a portfolio over the risk-free rate, per unit of total volatility — the classic risk-adjusted performance measure.

In more detail

Sharpe Ratio = (R_p − R_f) / σ_p, where σ_p is the total return standard deviation. A higher Sharpe indicates better risk-adjusted return. The Sharpe is appropriate for symmetric return distributions; for skewed strategies the Sortino or Calmar ratios are often preferred.